Roughly 75% of demand for the precious metal palladium is from catalysts of gasoline-fuelled cars, the type of cars which dominate roads globally.

The mineral is often considered an investment safe-haven, along with gold and platinum, but is equally known for its bouts of volatility in the market, often rising and falling with seasonal car demand.

Before Christmas 2016, the US palladium bar price jumped to an 18-month high, rising a whopping 24% month-over-month. However, at the beginning of January, prices dropped more than 7%. At the time, CPI Financial said profit-taking – which is the sales of securities that have risen in price – in the futures market was the most likely explanation for the drop.

At the time of writing, the price of palladium has climbed back up above $800 an ounce, to a near two-year high.

Some are touting palladium as the ‘forgotten’ precious metal to watch, calling it a better investment than gold, which posted a respectable 9% gain so far this year. Palladium’s spot price is up 17% year-to-date.

Platinum also enjoys strong industrial demand due to its widespread use in the automotive industry. However, unlike platinum, which is used by industrial firms but also sold in jewellery, palladium doesn’t have another major avenue for demand. Therefore, its value is largely at the mercy of prosperity in the automotive sector.

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By GlobalData

US auto sales are expected to remain robust this year, scaling a record high of 17.6 million vehicles. But Chinese demand is softening despite growth in the economy and, aside from a brief surge in car sales in March, demand in Europe, the world’s largest market for diesel-fuelled cars, is expected to fall short of the 2007 peak.

Furthermore, the sector has been knocked by the Volkswagen emission scandal – where the company rigged diesel cars so they could pass stringent environmental tests while emitting dangerous levels of pollution – and increasing global concern about pollution in city centres, as well as the rising popularity of electric cars and car sharing schemes.

“Toyota recently announced the availability of a new, smaller catalyst called Flow Adjustable Design Cell (FLAD) that uses 20% less precious metal in approximately 20% less volume.”

Also, Japanese car manufacturer Toyota recently announced the availability of a new, smaller catalyst called Flow Adjustable Design Cell (FLAD) that uses 20% less precious metal in approximately 20% less volume, while maintaining the same exhaust gas purification performance – demonstrating a move towards cost reduction via more efficient design and reduced materials by manufacturers.

Could these growing trends strip palladium of its strong market reputation, negatively effecting its future demand and sending it on a downward spiral?

Near future market expectation  

Senior metals analyst at Elliott Wave International, Tom Denham, doesn’t think that palladium’s current rally will hold.

The rally could continue higher, but pushing to new all-time highs would quickly raise the risk profile of palladium and increase the potential of greed giving way to fear,” says Denham.

“Greedy traders may ignore reports of new capacity coming online and focus narrowly on rising prices, but at some point, caution overcomes greed. Maybe some traders notice that supply is approaching demand,” he adds.

“Those traders stop buying and start selling,” he continues, “Market participants begin to worry that supply might exceed demand and the trend changes sharply as fear of falling prices and excess supply becomes the driver.”

This current price trend for palladium is a common one.

“Palladium has a long history of developing multi-year rises and falls in three-wave form,” says Denham.

“Palladium fell almost 83% after it peaked in 2001 before it bottomed in 2008.”

“Palladium rallied from 135.70 to 1,212.20 over the nine-year span from 1992 to 2001. Then prices fell from 1,212.20 to 207.45 in three waves over the seven-year span from 2001 to 2008. The three-wave move that began in 2008 is now in its ninth year,” he continues.

“Palladium fell almost 83% after it peaked in 2001 before it bottomed in 2008. The decline after the next peak is unlikely to match the depth of the previous fall exactly, but the history of palladium suggests it will be substantial.”

Longer term concerns

Some analysts believe that palladium will continue to remain high as tightening market conditions continue through 2018.

It’s certainly true that the major disrupters to the diesel car sector, such as electric cars and pollution management, are yet to have a major effect on demand. The electric car sector remains nascent and most Western countries – those mandated to reduce air pollution – have of late been consumed more by political struggles and elections than meeting pollution targets.

Moreover, new technologies, such as Toyota’s FLAD system, are unlikely to have a huge impact on the market right away.

But it’s only a matter of time. Automakers have a long history of copying technology trends and other manufacturers will surely follow suit.

Furthermore, the electric car market will only grow, even if at slower pace than hoped by the biggest EV manufacturer Tesla, and others.

According the International Energy Agency, the market shares of electric cars rose above 1% in seven countries in 2015: Norway, the Netherlands, Sweden, Denmark, France, China and the UK. Market shares reached 23% in Norway and nearly 10% in the Netherlands. China’s booming electric car sales in 2015 made it the main market worldwide, before the US, for the first time. China is also home to the strongest global deployment of e-scooters and electric buses.

Additional threats to palladium’s reign come from reports that it could face competition from ruthenium which, according to new research, can replace the metal in catalytic converters at a cheaper price.

“The surprisingly bullish sentiment does not reflect the looming slowdown in global car sales, driven by China,” the CPI Financial wrote in March.

“A weakening US dollar and prevailing bullish sentiment rather than improving fundamentals have pushed palladium prices beyond $800 per ounce last week. With slowing global auto sales, the outlook for demand remains rather weak and suggests that prices are due for a short-term correction.”

Palladium will probably peak further, but it seems that longer term structural concerns remain for the metal, meaning it will once again fall: the question is, how far? And will it reach these current peaks again?