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Palladium’s in a Fix—What’s Next?

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Palladium skyrockets

Palladium touched its 16-year high level of $910 on Friday, June 9. Palladium futures for July expiration touched the peak of $891 the same day. Spot markets are trading above the futures market—a situation referred to as “backwardation” (when a spot or cash price of a commodity is higher than the forward or future price). Remember, the spot market demands a higher premium.

It now appears that speculators are playing palladium prices higher, which has created a shortage. Notably, we’ve seen backwardation of almost $6 and $21 per ounce for June and July futures, respectively, over August contracts.

The fundamentals of the palladium market seem weak, as it’s widely used in gasoline-based engine cars, which are seeing slower demand in both China and the US.

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When we talk about palladium (PALL) markets, it’s crucial to look at the gold-palladium spread (IAU) or ratio. The above graph depicts the performance of the gold-palladium spread, a measurement of the number of palladium ounces it takes to buy a single ounce of gold. The higher the ratio, the weaker palladium in comparison to gold, because more ounces of palladium are needed to purchase an ounce of gold.

The gold-palladium ratio is trading at ~1.4 as of June 12, 2017.

RSI levels

The RSI (relative strength index) for the gold-palladium spread is 18.2. An RSI level above 70 indicates that an asset has been overbought and is a candidate for a fall, while an RSI below 30 indicates that an asset has been oversold and could rise. Such a low RSI can be an indication of a revival in price.

The changes in these precious metals are closely reflected in funds like the Physical Palladium ETF (PALL) and the SPDR Gold Shares ETF (GLD). Mining companies like Eldorado Gold (EGO), Kinross Gold (KGC), Silver Wheaton (SLW), and IamGold (IAG) are also impacted by the fluctuations in these precious metals.

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