Since opening December at $682, palladium prices have made a nice run closing last week at $738. Part of this was due to a massive increase in speculative long positions in the futures market on the Fed's announcement of additional stimulus measures last month.
Following the U.S. "fiscal cliff" deal, palladium rebounded strongly at the start of 2013 (along with platinum), rising to $711 on 2nd January, a level last seen in March of 2012. However, it has since consolidated and spiked to over $750 only to pull back to the $730 level on some recent weakness. Much of this weakness was attributed to falling platinum prices (pulled back along with gold), after the Federal Reserve suggested that its quantitative easing program could end sooner than expected.
Palladium's fundamentals can be quite attractive even when its price is on a downward track. Though palladium is a precious metal, it tends to trade differently than its peers, which include gold and silver. Those metals are commonly targeted and monitored for their safe haven appeal and may perform well even in bleak economic conditions. Palladium, which is considered a cyclical commodity, is not generally sought for protection. It tends to perform best when there is a prevalent appetite for risk. During times of economic turmoil or uncertainty, when investors are de-risking, it is common to find palladium prices caught up in the same negative sentiment - thus prices fall and ETF holdings decline.
With regard to the forecast, many (including myself) expect palladium prices to move steadily higher over the next few months and beyond. Given the metal's recent strength, I believe palladium is set to gain some momentum and traction-- mainly due to rising demand and a continued supply deficit. Furthermore, palladium was overlooked for much of 2012 but many believe investors will find the metal more attractive this year and investment demand is therefore expected to be an additional source of support for the market.
Subject to any further developments on the platinum supply side, I would not be surprised to see palladium challenging the $765 level over the next 60 days. Despite the usual profit-taking and the potential of lower platinum prices in March, I still expect palladium prices to maintain an upward trend. Strong support should come from the metal's positive fundamentals due to the expected substantial underlying deficit for the seventh consecutive.
Furthermore, palladium should be able to take advantage of the growth in global auto sales as global car sales exceeded 80 million for the first time ever in 2012 and are expected to surpass that number in 2013. With a robust recovery in the North American auto sector and a continuation of a solid increase in the auto sector in China, prospects for automotive demand for palladium remain favorable. According to the China Association of Automobile Manufacturers (CAAM)，China's auto production was 1,964,500 units in January, an increase of 10.06% compared with December, and up 51.17% compared with the same period of last year.
One company that may benefit from the anticipated increased demand for palladium is U.S.-based Stillwater Mining (SWC). As stated earlier, gold and silver get all the attention in the precious-metals world, yet platinum and palladium are far scarcer, and SWC is the only U.S. source for platinum-group metals. Stillwater Mining claims to be largest palladium producer outside of Russia and South Africa. One of the key factors of Stillwater's success may be tied directly to the strong demand for its metals. That, in turn, relies largely on the health of the global auto industry, which uses platinum and palladium in catalytic converters.
Furthermore, Stillwater Mining should benefit from mine shutdowns in South Africa by Anglo American Platinum (AAUKY) as the company stated in January that it will cut output by 400,000 ounces, and since then platinum and palladium prices have soared so far in 2013.
Currently trading at just below $13, Stillwater offers some great upside potential as the company hit almost $24 just 18 months ago and has been on a steady upward climb from the $8 level last September. A 50% retracement would offer a $16 price from a technical perspective.