Hedge funds returning to palladium as ETPs retreat

Pros, retail traders diverge...

Palladium bars Palladium bars

Hedge funds are siding with analysts predicting decade-high palladium prices even as investors cut holdings in exchange-traded products backed by this year’s worst-performing precious metal.

The funds’ wagers on a rally more than doubled since August as ETP holdings slumped to a seven-month low, data compiled by Bloomberg show. Prices for the metal used mostly in catalytic converters will average $800 an ounce in the third quarter, 34 percent more than now and the highest since 2001, based on the median of 13 analyst estimates.

Speculators that slashed bets to the lowest level since 2009 in May as growth slowed are now more bullish after central banks from the U.S. to Europe to China pledged additional measures to boost economies. Palladium’s 9.1 percent retreat this year contrasts with a 9.7 percent advance in platinum, driven by mine strikes and violence in South Africa, the biggest producer of the metal also used in autocatalysts.

“Platinum got the South Africa boost but palladium didn’t enjoy that,” said Jeffrey Sica, the Morristown, New Jersey- based president of SICA Wealth Management, who helps oversee more than $1 billion of assets. “I do anticipate higher prices because of the global liquidity push. At some point there will be growth revival.”

Annual Shortage

Palladium is retreating for a second year and traded at $595.35 in London. Gold gained 9.5 percent and silver 15 percent since the start of January. The Standard & Poor’s GSCI gauge of 24 commodities fell 1.1 percent and the MSCI All-Country World Index of equities gained 9.5 percent. Treasuries returned 1.7 percent, a Bank of America Corp. index shows.

Demand will rise 1.4 percent to 9.67 million ounces next year, the second-highest ever, as supply gains 3.2 percent to 9.59 million ounces, Barclays Plc estimates. Morgan Stanley is also predicting a second consecutive annual shortage in 2013.

That may grow as South African strikes spread. Police shot 34 protestors at Lonmin Plc’s Marikana mine on Aug. 16 amid the worst violence in the mining industry since the end of apartheid in 1991. The country produces 75 percent of the world’s platinum and 35 percent of its palladium. AngloGold Ashanti Ltd. and Gold Fields Ltd. began firing more than 20,000 workers this month as ultimatums passed for employees to return for duty.

The Federal Reserve said Sept. 13 it will buy $40 billion of mortgage debt a month and central banks in Europe and Japan also pledged to buy more assets last month. China, the biggest palladium user, approved a $158 billion subways-to-roads construction plan. The nation’s growth will accelerate in this and the next three quarters, after slowing since the start of 2011, based on the median of as many as 31 economist estimates compiled by Bloomberg.

Central Banks

The central bank stimulus may bolster demand for cars, which account for 40 percent of platinum demand and 66 percent of palladium consumption. Worldwide sales of cars and light commercial vehicles will rise 5.3 percent to a record 85.3 million units next year, according to LMC Automotive Ltd., a research company in Oxford, England.

Hedge funds and other large speculators held a net-long position of 7,723 palladium futures and options by Oct. 23, U.S. CommodityFutures Trading Commission data show. While that’s down from 10,536 contracts on Oct. 9, the most since March, it compares with 2,436 contracts held in May, the least according to data compiled by Bloomberg going back to December 2009.

That reversal has yet to be reflected in ETPs, which fell 6 percent to 58.4 metric tons valued at $1.12 billion since mid- June. Holdings in platinum products jumped 13 percent, those in silver expanded 4.9 percent and gold rose 8.7 percent, data compiled by Bloomberg show.

World War

The drop in palladium reflected mounting concern about growth. Demand contracted in 2008 and 2009 as the global economy endured its deepest slump since World War II. The International Monetary Fund cut its forecast for next year to 3.6 percent from 3.9 percent on Oct. 9. The 17-nation euro area will contract 0.4 percent in 2012, the Washington-based group estimates.

“If we see another recession, or if growth rates won’t be as high as forecasts are, you could see smaller demand,” said Thorsten Proettel, an analyst at Landesbank Baden Wuerttemberg in Stuttgart, Germany. “We’ll need more demand or supply interruptions for higher prices and I wouldn’t expect both for the next year.”

While analysts expect another year of shortages in 2013, it will be smaller than in 2012, with Barclays predicting a narrowing to 78,000 ounces from 234,000 ounces. There may be 6 million to 9 million ounces stockpiled globally, according to Standard Bank Plc, with the higher figure equal to almost 16 months of mine production.

Next page: Nickel and Rhodium

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