Will these metals outshine gold?

Palladium can rise with strong auto sales, platinum may suffer from dollar rally

After staying muted for a large part of 2016, palladium and platinum have had good starts this year. While platinum prices are up about 12 per cent, palladium is higher by about 15 per cent.

The inverse correlation of metal prices with the US dollar is known. While in the short term it may be the dollar story, is the currency factor the only driver?

It is likely that the recent rally in platinum group metals (PGMs) may have more to do with anticipated fiscal policy announcements from the Trump administration.

There are hints of announcements on US corporation tax and tax on repatriation of overseas earnings.

If realised, it will have a significant impact on the dollar and US rates and the dollar is expected to rally much harder. As a consequence, gold will quickly fall below $1,200 an ounce.

So, the question is whether platinum and palladium will outperform gold.

In the case of palladium, the answer seems to be yes. The pace of auto sales will be a strong indicator and driver of the palladium market. Recently, in China, the sales tax on automobiles was doubled to 5 per cent. It is, however, believed that the impact on sales has been marginal, as manufacturers and dealers have largely absorbed the rise.

The sales trend needs to be watched as rising inventories at Chinese dealerships should also be on the radar for anyone with a long palladium position, say analysts. As of now, it is unclear whether the increase in inventory is the result of seasonal factors (Chinese New Year holidays) or whether due to decelerating sales, according to industry representatives.

Greater risk

On the other hand, platinum is at greater risk from a resumption in dollar rally. The metal has continued to trade at a discount to gold and its premium to palladium has narrowed. Unlike gold, silver and palladium, there has been no compelling reason to buy platinum.

Turning tide

However, a closer look now at the fundamentals would suggest that the tide may actually be slowly turning. There are supply side risks emerging. Mining industry leaders are talking about risks to future supply although it is tough to quantify the extent of supply loss and the timeline.

The demand side seems to be interesting in a mixed way. Platinum jewellery sales in China have dropped substantially. In the event, there is no incentive or compelling reason for investors to return to the market any time soon. Additionally, the emission performance of diesel cars is also under investigation.

So, in the short term, the risks to platinum prices are surely rising. But, looking a little ahead, the fundamental tide may be slowly turning in favour of platinum. The strength of the heavy-duty diesel market is a reliable driver of the metal. The second quarter of 2017 will see the metal trading above $1,000 an ounce.

(The writer is a commodities and agribusiness specialist)

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