Palladium. 123RF/ ALEXLMX
Palladium. 123RF/ ALEXLMX

Palladium continued its record-breaking rally even as investors considered whether the metal has risen too high, too fast.

The metal flipped to gains after initially falling almost 3% on Monday, despite technical indicators continuing to signal that a pullback may be due. Spot prices reached an all-time high of $2,577.27/oz as tight supply conditions show little signs of easing.

Palladium is in a “real sweet spot” of recovering industrial production globally, improving demand due to strong car sales and constrained mine supply, said Wayne Gordon, executive director for commodities and foreign exchange at UBS Global Wealth Management. Also, the level of substitution has been less evident than expected given its price relative to platinum, he said.

“Setbacks after these sorts of rallies, given the very thin nature of volumes in the market, isn’t that surprising,” Gordon said. “If industrial production surprises to the upside, and so does autos’ demand, well, then palladium can get a heck of a lot tighter.”

Spot palladium traded 1.5% higher at $2,537.60/oz at 11.24am in London. So far in 2020, the metal has surged about 30%. Platinum also gained on Monday, adding 0.3%, while silver and gold were little changed.

The metal’s surge is rooted in positive fundamentals, with production trailing demand as stricter emissions standards boost consumption by car makers, and as uncertain power systems in SA worsen supply constraints.

Another factor is that producers don’t have the capacity to boost output easily in response to price increases because palladium is largely mined as a byproduct. The cost to borrow palladium has jumped to the highest in over a year.

The speed and scope of palladium’s gains have surprised market watchers, with some warning that prices may have gone too high, too fast. Still, most continue to point to a bullish outlook on robust demand and constrained supply.

The metal’s technical indicators are stretched, with the 14-day relative strength index topping 90 for a second day. A number above 70 signals to some traders that an asset may be overbought, though palladium has held above that level for two weeks without a pullback.

Palladium has been surging together with US equities as there’s still some spare liquidity in the market, while investors are searching for assets whose fundamentals guarantee high returns, said Gianclaudio Torlizzi, MD of consultancy T-Commodity Srl A Socio Unico.

“Fomo”, or the fear of missing out, is adding fuel to the fire. “Or better to say ‘Tina’ — there is no alternative,” he said.

The US stock market has showed some signs of exhaustion so a setback is possible — in equities and in palladium — though it’s hard to say how big it could be, Torlizzi said.