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Will Palladium ETF's 2019 Rally Continue Next Year?

Sanghamitra Saha

Palladium prices have been on a tear for two years. Pure-play Palladium ETF Aberdeen Standard Physical Palladium Shares ETF PALL added 78.5% in the past two years (as of Oct 22, 2019), against about 16% gains in SPDR Gold Shares GLD and the S&P 500. So far this year, the palladium ETF has jumped 39% versus 15.6% expansion in the S&P 500 and 19.5% spurt in GLD.

What’s Behind the Rally?

The rally has mainly been backed by growing global demand and stagnating supply. The Palladium market is on its way to an eighth consecutive year of deficit in 2019, according to specialty-chemicals company Johnson Matthey, as quoted MarketWatch. While supplies from major producers, including Russia and South Africa, are not growing (per analysts), demand has been on the rise on increased consumption of gasoline engines.

Notably, the automotive industry, mainly involved in the manufacturing of catalytic converters for vehicles, is a big driver for palladium. In fact, platinum-using diesel-fueled cars are actually experiencing market share loss “amid an environmental backlash.” Stringent emission control norms have been fueling demand for Palladium-using petrol-fueled cars as governments around the world look to fight climate change.

“Increasing environmental scrutiny of vehicle emissions in China and Europe has clearly been constructive for palladium demand,” ING analysts said in a recent note to clients, as quoted on Wall Street Journal. China, the largest auto market, will necessitate each vehicle to contain around 30% more palladium, platinum and rhodium from 2020, per analysts at Morgan Stanley.

Apart from environment-originated demand, a low-rate environment globally is acting as a tailwind. The Federal Reserve has cut interest rate twice this year. This subdues the strength of the U.S. dollar. Since most commodities are priced in the U.S. dollar, commodities see a price rise in a low-rate environment. Also, rising demand for safe-haven asset is also facilitating the rally in this precious metal (read: Global Real Estate ETFs Scaling Higher: Here's Why). 

The market has shifted to a deep backwardation – “a situation associated with supply tightness when contracts for metal for near-term delivery are more expensive than later-dated ones.” Analysts, hedge funds and other investors are betting on further gains out of this already red-hot palladium market.

Net bullish bets on palladium rose to their highest level in nearly two months during the week ended Oct 8, Commodity Futures Trading Commission data revealed. Mitsubishi analyst Jonathan Butler sees palladium prices in the range of $2,000 over the next 12-18 months.

Against this backdrop, investors should have a look at the palladium ETF in detail (see all Precious Metals ETFs   here).

PALL in Focus

This ETF is designed to track the price of Palladium Bullion. The fund has amassed about $275.5 million in assets and charges 60 bps in fees (read: Trump May See Easy "Win in 2020:" ETFs to Bet On).

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Aberdeen Standard Physical Palladium Shares ETF (PALL): ETF Research Reports
 
SPDR Gold Shares (GLD): ETF Research Reports
 
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