- Vehicle demand. This amounts for more than 60% of Palladium demand. The forecast for the automotive industry for 2018 is positive.
- The stockpiles are not released by the Russian government so this is an unknown factor. Any sanctions to Russia affecting its exports of the metal (very unlikely to happen) will affect its price since it is one of the two the largest producers in the world. The relation of USD with the ruble can also affect the price.
- South Africa is the second and political unrest combined with prolonged strikes, increasing mining costs etc could influence the price.
- Recycling. A lot of vehicles have reached the ten year cycle and the recycling of their catalysts could affect the price (rather small impact)
However, these are not as likely to affect heavily the price of palladium or to cause sudden price fluctuations and unexpected volatility, as institutional investors are. And this includes large speculative hedge funds.
The palladium market is thin and it is very susceptible to such events.
What is happening in the ETF and the futures market is what drives the price.
And to make a valid prediction on what happens in such a speculative environment is almost impossible. Therefore it comes as no surprise that the price collapse of 2015 was not predicted but merely explained as it was unfolding by most analysts.
The question to ask is, will the market reach a state of contango and when? According to some research teams this could happen in the next few months. Others argue that there is going to be a higher than expected demand from the auto industry and this will drive the price up.
In the first scenario the price could dive to 890 and if it crosses that, then 820 is a possibility.
In the second scenario, the price could test new highs. And that is that. It does not exclude a major pullback. It just transfers it further in the future.
The main issue in the first scenario is that if it materializes it could easily unfold in a matter of few weeks, and it could easily be with very few, if any, price retracements of a considerable size. In fact it is very common for speculators to act "en masse", so a price plunge rather than a gradual drop is quite probable.
So, is "jumping of" the current well established trend the preferred action? Fundamentally speaking it is not justified. But as stated above, it is not likely that fundamentals will will be the main factor of influence.
The choice seems to be purely speculative.
Provided that the strategy followed (ie the number of orders, their sizing, the current capital, and the ability to support open positions) is adequate to withstand the scenario that the price drops without major retracements to around 800, then positioning should be long.
The speculative assumption is this positioning strategy is that the price will not go below 800 which is already a very big distance from current levels.
This assumption could be proven wrong, given that the price of XPDUSD is determined not by its true value (value driven by physical demand) but by futures and ETFs. The pull back will happen when speculative funds liquidate their long positions and 800 may not be the bottom of the fall.
Short positioning assumes that the current rally is out of steam and that the pull back will happen soon. Palladium is highly overvalued and speculative funds will liquidate sooner than later to secure profits. This is a valid assumption. The time factor though is an unknown and hence speculative.
The deciding factor in drawing a valid strategy with the least amount of speculation in it, is the following:
There is a supply deficit in palladium. Some calculate it to around 1 million ounces and some some others to 1.4 million ounces. And this is a deficit in the physical supply. There is no financial speculation involved. For 2018 all projections suggest that this deficit will grow considerably.
At the same time demand is growing globally driven by the auto industry which is projected to grow globally in 2018.
So, the pullback will eventually happen since the current price does not represent physical demand but it includes a large amount of speculative funds. When this will happen cannot be predicted in any way.
Although not impossible, it is not likely that the price will fall below 800 when the pullback happens, since there is a a large deficit in supply and demand is likely to grow.
Taking the above into account, positioning in the medium / long term is long in a rather conservative and definitely not in an aggressive way.
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