What do Record-breaking Auto Sales Mean for Palladium?

- December 3rd, 2014

Lately strong auto sales have been driving a bullish outlook on palladium. However, when auto sales in both Canada and the United States broke records in November, palladium prices didn’t immediately react. But why?

What do Record-breaking Auto Sales Mean for Palladium?As many precious metals investors know, lately strong auto sales have been driving a bullish outlook on palladium due to the metal’s use in catalytic converters for vehicles. However, when auto sales in both Canada and the United States broke records in November, palladium prices didn’t immediately react. Why not?

According to Reuters, the six biggest automakers in the US reported higher sales than analysts were expecting on the back of low oil prices and some Black Friday buzz. The automakers hit an annualized sales rate of 17.2 million vehicles for the month to reach the best pace for November since 2003, also beating a Thomson Reuters survey prediction of 16.7 million. Canada saw a similar story, with truck sales driving automotive sales up 3.6 percent even as car sales slipped slightly.

No knee-jerk reactions

Roughly 50 percent of the world’s palladium supply is used in catalytic converters, so those figures certainly bode well for the metal. However, on Tuesday, when the news was announced, palladium fell with the other precious metals — the white metal lost 0.8 percent to trade at $798.05 per ounce, while platinum also lost 1.7 percent to trade at $1,212 per ounce, according to Reuters. Palladium dropped slightly more on Wednesday to reach $796 per ounce.

Certainly, there was no knee-jerk reaction from the platinum-group metals space in response to November’s excellent auto sales, and Matthew O’Keefe, vice president and senior analyst at Dundee Capital Markets, offered some insight as to why that might be.

First, he gave a reminder that “platinum and palladium tend to trade in sympathy, to some degree, with gold and silver.” And while palladium escaped a downgraded outlook from BMO Capital Markets in October, that doesn’t mean it’s completely exempt from the general trends hitting precious metals.

In that vein, the analyst also noted that even though the automotive and jewelry industries make up most of the demand for the white metals, investment demand also plays into prices. “I think what you’re seeing there is … that trade has been a bit oblique lately and that’s what’s been putting pressure on the metal price,” he said.

Positive long-term outlook still going strong

O’Keefe cautioned that palladium prices are “harder to call” in the short term because of “the push and pull between the financially driven buying and selling and the actual supply and demand,” but of course, like most, the analyst is positive on the long-term outlook for palladium.

“We’re with the rest of the observers in thinking that long term, the fundamentals are very good,” he said, noting that platinum and palladium are now going into their fourth year of structural deficit as demand continues to grow. While O’Keefe expects to see some pressure on the metal continue through Christmas, he anticipates that in the first quarter investors “should see a little more actual physical supply/demand driven [pricing].”

Certainly, that’s something that those with a stake in the palladium space will be happy to hear. To be sure, investors will be watching price trends and auto sales figures closely as the new year approaches.


Securities Disclosure: I, Teresa Matich, hold no direct or indirect investment in any of the companies mentioned in this article.

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