Palladium Pushed Platinum To Record Low

A year ago I wrote about the platinum/palladium ratio as it was on the edge, and there were two possible options, to restore the historically normal supremacy of platinum (target 1.93 oz) or to prolong the triumph of palladium (target 0.56 oz.).

This month the Platinum/Palladium ratio hit a new record low of 0.55 oz. amid the rocket move to the upside in the palladium market; the latter became the most precious metal beating gold. Let’s take a look at the big picture below.

Chart 1. Platinum/Palladium Ratio Monthly: New Record Low

platinum/palladium ratio
Chart courtesy of tradingview.com

The chart above starts with a robust growth to the upside from 3 to 5 oz. and this move had set the “normal” range for the fluctuations of the ratio within the next two decades. It was interrupted only once in 1997 when the ratio fell out of the range and quickly dropped to establish a previous record low of 0.56 oz. in 2001 amid rumors that Russia would ban palladium export. It was a textbook example of a “sell rumors - buy facts” market behavior, the ratio was down on rumors and then when the reality didn’t confirm it the ratio quickly returned to the normal range making a beautiful V-shape pattern. Then the ratio had spent another decade in that range.

I already shared my thoughts about the surprising changes in the systematic way of life during the first decades of every new age and added here that we are living during the shift of centuries. A hundred years ago the horse “emissions” problem was solved as they were replaced with automobiles. These days we see how electric cars with zero emissions are going to replace cars with fossil fuel engines. All of this translates into the market as platinum fell to be the first prey.

The dream of a “clean” diesel was broken forever, and this had sent the ratio below the range. The growth cycle (blue), which had started at the beginning of the century finally faded to return to the bottom in almost two decades. The new bottom is yet to be established so let’s wait and see.

I added two triggers (orange) on the upside as one day the “green” guys would come for palladium-equipped gasoline engines, and this bubble will burst to reverse the ratio. The closest trigger is located at the top of a small consolidation at the 1.03 oz. The next one is located at the top of a larger one at the 1.93 oz.

Where do you see the bottom of the ratio?

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Chart 2. Platinum Futures Monthly: Another Drop Could Be Ahead

platinum/palladium ratio
Chart courtesy of tradingview.com

Last time I updated the platinum chart in October of 2017. There was a consolidation in the making (black lines in the chart above), and I naturally surmised that another drop would follow to tag the former low of $752. Indeed, the market moved down for $170 (18%) and almost hit the target, but reversed $3 ahead at the $755.

Nowadays, there is another smaller consolidation (orange) has been shaped. It looks like we are still in that drop, which had started last January after a larger consolidation. It could be the final move down as usually there is a small but visible consolidation preceding it. I highlighted two possible targets on the downside between the $640 and $401, which were set based on the historical extremes.

The reversal point is even further now above the $1014, where the recent consolidation has peaked.

What is your target for Platinum?

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Chart 3. Palladium Futures Monthly: All Minimum Targets Has Been Reached

platinum/palladium ratio
Chart courtesy of tradingview.com

Corrective structures are tricky, and I repeat this mantra, again and again, first of all, to be cautious during trading. And it is even worse in this kind of iliquid markets like palladium. Last year I thought that the price of palladium above $1100 was enough to demotivate panic buying. The price then started to drop quite rapidly confirming my take. Later, it turned out to be just a “small” correction of 30% down to the $800 area. The following rocket move has hit the $1553 record high making palladium the most precious of metals.

It’s not wise to guess the top or bottom of the market. Therefore, I would only tell you some actual measurements from the updated map. A decade long move of $1010 in blue AB segment from 1991 till 2001 was fully repeated in the blue CD segment, which advanced for $1100 in just three years as it was a sharp move. The CD move in its turn consists of two green sub-segments. The green cd segment (distance = $738) is already greater than the ab segment (distance = $681). So, both small and large segments reached its minimum targets.

The current candlestick on the chart could shape a famous Harami reversal pattern. Harami means pregnant in Japanese. You can see that this month’s candle opened below February’s close and it has a small body within a greater body of previous month shaping a “belly” of a pregnant “mother.” But this pattern is yet to be completed as the month has just started but be careful.

Where do you see the top for Palladium?

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The situation in the market is simple to understand. The “green economy” approach tightens the emissions requirements, which in its turn leads to a structural deficit in the market as demand for palladium should grow accordingly. Add here the possible supply cut from South Africa (one of the main suppliers) due to the new president’s policy of land redistribution.

We should consider another factor here, which has even more significant influence in the long term. I already wrote earlier that it is not that easy for car producers to re-tool their sites with cheaper platinum catalysts as it requires additional unbudgeted investments amid tough competition and slowing demand. The future path is clear as electric cars are already in our present. The notorious giant Volkswagen previously announced $50 billion electrification plan. All of this demotivates car makers to change palladium to platinum as it is a dead-end. Maybe this is an agonizingly slow move in the palladium market ahead of total fading. The price of horses also grew heavily in the days when automobiles were introduced as demand was strong. But then people switched to conventional cars.

Intelligent trades!

Aibek Burabayev
INO.com Contributor, Metals

Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

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