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4 Reasons Why Palladium ETF is Shining

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Sanghamitra Saha
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Palladium price has been scaling up of late. The pure-play palladium ETF ETFS Palladium Trust PALL is up more than 11% in the past month (as of Sep 24). The net long positions in the metal reached the highest level since Jul 10. The rally was backed by growing global demand and stagnating supply.

Below we highlight a few reasons that have probably been driving the rally.

High Demand from Auto Industry

Notably, the automotive industry, mainly involved in the manufacturing of catalytic converters for vehicles, is a big driver for palladium. A jump in new-car registrations in the European Union during July and August drove palladium prices, per Commerzbank analysts, as quoted on Wall Street Journal.

Also, Palladium-using petrol-fueled cars are “the primary type sold in the two largest markets of China and the US,” as per the source. So, increased usage of petrol-driven vehicles has a role in driving the price of palladium.

In fact, platinum-using diesel-fueled cars are actually experiencing market share loss “amid an environmental backlash,” going by the above source. And platinum’s loss is turning out to be palladium’s gain. Palladium’s premium over platinum has risen to about $170 per ounce, the highest since March 2001, per Reuters.

China’s Focus on Building Domestic Demand

Investors should note that China has long been working on stepping up domestic consumption, reducing focus on exports and moving to a ‘slower and more balanced growth’ economy. This is especially true given the trade tensions between China and the United States.

Per Wall Street Journal, analysts believe that the Chinese government’s intension to boost domestic growth has led to a rally in the overall metal market. Along with palladium, nickel and copper registered considerable increases in the recent trading sessions.

Demand Outstrips Supply

The article published on Wall Street Journal pointed out that analysts see “the prospect of global demand exceeding supply for a third straight year”, brightening the appeal for palladium. Johnson Matthey Plc, a London-based metals trader and one of the world’s largest makers of catalytic converters, expects continued “consumption of palladium for gasoline engines to fuel another supply deficit this year.”

Investors’ Growing Risk Appetite

Though trade tensions have been rife between China and the United States, some market watchers are probably not taking the possibility of a full-blown trade war and a slowdown in the Chinese economy too seriously, if we go by the Wall Street Journal article (read: US-Sino Trade War Escalates: Most Vulnerable Sector ETFs).

There is growing risk appetite among investors. “Japan’s Nikkei Stock Average just had its best two-week stretch since July 2016, and the Shanghai Composite logged its best week in 30 months.” And why not? Japan's economy expanded the fastest in the second quarter of 2018 since 2016, courtesy of higher-than-estimated capital spending (read: What's Behind the Surge in Japan ETFs?).

The U.S. economy is also shaping up as satisfactory. The European Central Bank’s chief Mario Draghi sees “relatively vigorous” rise in underlying euro-area inflation. All these point to a revival in global growth, which has probably driven up the demand for industrial metals like palladium (read: Top Foreign ETFs of Q3).

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