Palladium prices have soared in recent months, even higher than gold prices. I wrote about this before palladium topped gold, saying I was skeptical that would happen, and that it wouldn’t last if it did. Mr. Market has proved me wrong—at least on the first part. I’m sure glad I didn’t say it could never happen.
So, is it time to stop ignoring a winning bet and jump onboard—or would that be like getting into Bitcoin in late 2017?
Let’s have a look…
I’ve included platinum in the chart for reference. Gold, platinum, and palladium were roughly trending down together until last August, when all three turned upward. But platinum’s rally fizzled, and palladium outperformed the others by far.
It’s important to understand that it’s purely industrial demand driving palladium prices. Palladium is used for controlling pollution emitted by gas-powered cars. (Platinum is better for diesel engines.) There’s no flight to safety into palladium. But the perception is strong that there will be increased demand for palladium in Europe in the wake of the “dieselgate” scandal, and in China, where most people have preferred gasoline-powered cars to diesel all along.
But the EU economy is stagnant, and we now know that the Chinese economy was decelerating the same quarter palladium surged. This suggests to me that the “storyum” here is more important than the palladium itself at present.
This makes me more skeptical than ever.
To explain why, let’s pull back to look at the bigger picture…
Several things stand out in this chart. First is that while all three of these metals tend to spike and dip at the same time, their overall trends can remain quite different for years. Second is that after either platinum or palladium spikes, they tend to positively crater afterward. The selloffs do indeed remind me of Bitcoin after its 2017 peak.
Perhaps more important is that 20 years ago, platinum and palladium both spiked well above gold—with palladium trouncing platinum then as it is now. It didn’t last. And it didn’t make palladium a safe-haven asset—certainly not a monetary metal. After peaking, palladium underperformed both gold and platinum for the next 15 years or so.
Fast forward to today. The “China likes gas-powered cars” story has driven palladium nuts at a time when a pack of new Chinese automakers are bringing cheap new electric cars to market. This does not look sustainable to me.
I stand by my analysis. Palladium is more expensive than gold today, but that doesn’t make it a precious metal—not in the sense of something that can be used to protect wealth. Remember that palladium prices have tripled over the last five years. The last time something like that happened to platinum or palladium, their next steps were to fall off cliffs.
There’s more to the story, of course...
Supply: Politics Could Change Everything
- A major conflict with Russia—which produces most of the world’s palladium and a great deal of its platinum—could send prices of both metals higher.
- An economic and social collapse in South Africa—which produces most of the world’s platinum and much of its palladium—could also send both metals higher.
- If both of these things happened at once, it would send platinum and palladium prices through the roof.
But what are the odds? There are sanctions and sniping around the edges with Russia, but nobody wants to seriously provoke the Russian bear. South Africa is a terminally dysfunctional society, but it’s a relatively rich country that’s been on the skids for decades. It could well hold itself together for many more years of decline ahead.
There’s no solid reason to claim that either Russian or South African supplies of platinum and palladium will be cut off this year. This means that betting that these political factors will drive palladium prices higher this year is not a rational speculation, but a gamble on random chance.
Demand: The Trade War Is Bad for Palladium
It makes no sense at all to me to bet on higher palladium prices because of Chinese demand—when China saw a 6% decline in auto sales last year.
Unless Trump and Xi make a deal soon, I think the odds favor palladium prices falling hard.
If the trade war does end, and freer, better trade ensues, we might see palladium prices head higher for some time. Or not. Many experts say the Chinese economy would be decelerating even without the trade war. But let’s say China does pick up again, for whatever reason, and that boosts palladium prices. That could last until the next time industrial metals get whacked—which could happen with the next round of global economic figures.
But even if the global economy picks up again, higher palladium prices won’t last beyond the point when all those new Chinese electric cars steal the market from gas-powered cars. Not even supply disruptions in South African or Russia can stop this. Given how quickly I’ve seen things change in China, I think the speed at which China will go electric will astound most analysts in the West.
That’s when palladium will go back to being just another silvery industrial metal.
So… is palladium like Bitcoin in 2016—or in late 2017, just before it tanked?
Honestly, I don’t know—and I wouldn’t believe anyone who said they did.
Remember how many people were saying that Bitcoin in late 2017 was on its way to $40,000, $100,000, or even $1,000,000? They had very persuasive arguments. I’m very glad I didn’t listen.
That said, given how many people have written to me lately asking about palladium, I have to say that the market feels pretty manic to me. That’s evidence of it being late in the cycle.
What I sure of is that palladium can in no way be called a “buy low to sell high” opportunity.
Palladium is in the “buy high and pray with all your heart to sell higher” category.
But even if I were wrong about that, I would never consider putting savings into palladium. Neither would anyone else I know. I’ve never heard anyone saying, “Good as palladium, man!”
When the fear trade drives markets en masse back into gold—for which I do see multiple triggers this year—I don’t expect palladium to even be a contender. Silver, on the other hand, should do spectacularly well. That’s where I’ve been putting my own money in my most recent trades.
Caveat emptor,
