Panic Buying Hits Palladium Market: What Comes Next?

This week, a white metal reached a rare feat. Palladium has traded at a higher cost per ounce than gold.

Last month, the palladium market pushed through all remaining technical barriers by posting a new all-time high. A chronic supply deficit now threatens to launch palladium prices into a super spike.

A true shortage of physical metal may be at hand. The primary source of demand is automakers who require palladium for catalytic converters. Supply, meanwhile, comes primarily (more than 80%) from just two unreliable countries: Russia and South Africa.

On the London Bullion Market Association (LBMA) exchange, the palladium market is showing signs of extreme stress – even panic.

LBMA lease rates for palladium, which in recent years hovered barely above zero, have shot up to as high as 22%. That means palladium users are willing to pay loan shark rates just to be able to get their hands on this scarce commodity.

Could the palladium market be foreshadowing future developments in platinum, silver, and perhaps even gold? That question now figures prominently in the minds of metals investors.

Many silver bugs point to mining supply deficits as well as years of artificial price suppression as reasons to expect shortages and buying panics in silver. They may well be right.

However, the metal that tends to follow most closely in palladium’s footsteps is platinum. Both metals are used in catalytic converters. So when one gets substantially more expensive than the other, manufacturers have an incentive to switch.

Switching from palladium to platinum isn’t as simple as it sounds. With some modern high-performance catalytic converters, only palladium works. It can take up to 18 months for automakers to re-tool their production lines for a switch.

With platinum currently selling at a discount of more than $400/oz. to palladium, the economic incentives to substitute should start driving more demand to platinum. It will take place gradually – and the effect on price may be not, be apparent for months.

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