Why the Gold-Palladium Ratio Fell at the End of 2016



Volatility measure

Palladium is used mostly for catalytic converters by the automotive industry. It’s also used for manufacturing electronics and chemical and dental applications. It’s sourced mainly from mine production and recycling.

Alongside the other three precious metals, palladium has seen an upward movement, rising almost 16.5%. The demand for the metal is strongly outstripping its supply, which is a primary reason investors could see a further upswing in the metal.

In 2016, palladium was underperforming its precious metal peers, but now it’s outperforming them. The call implied volatility for palladium, which measures the change in the price of a call option with the change in the price of an asset, is close to 30.6% over the past month.

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What the ratio stands for

The above graph shows the performance of the gold-palladium spread, or the gold-palladium ratio. The spread measures the number of palladium ounces it takes to buy a single ounce of gold. The higher the ratio, the weaker palladium is compared to gold because more ounces of palladium are needed to buy an ounce of gold. The ratio is trading at 1.6 as of February 16, 2017.

The gold-palladium spread has seen its ups and downs over the past few months. However, once again, palladium is overtaking gold. The spread fell substantially during the last quarter of 2016.

RSI levels

The RSI (relative strength index) for the gold-palladium ratio was as low as 36. An RSI level above 70 indicates that an asset has been overbought and could fall. An RSI below 30 indicates that an asset has been oversold and could rise.

Fluctuations in these precious metals are closely reflected in funds such as the ETFS Physical Palladium (PALL) and the ETFS Physical Swiss Gold (SGOL). Precious metal mining companies that have recovered from the fall in the last quarter of 2016 include Goldcorp (GG), Iamgold (IAG), AngloGold Ashanti (AU), and Kinross Gold (KGC).


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