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What's Driving the Relentless Rally of Palladium ETF?

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Palladium has had a strong start to 2020. After returning around 77% in the past year, the auto-catalyst metal has gained more than 40% so far this year. Accordingly, the Aberdeen Standard Physical Palladium Shares ETF (PALL - Free Report) has added 40%, with an 83.4% increase over the past year (as of Feb 19, 2020). The auto-catalyst metal just touched an all-time high of $2,849.61 per ounce. In fact, looking at palladium’s tireless rally, Edward Meir, an analyst at ED&F Man Capital Markets, called the metal “Tesla stock of commodities”. Strict emission control norms have been fueling demand for Palladium-using petrol-fueled cars whereas a widening supply-demand deficit continues to be the major reason driving the metal. It is to be noted that the surge in palladium prices was undeterred by shutdowns and delays at auto factories in China due to the coronavirus outbreak (read: Precious Metal ETFs & Stock Sizzling This Valentine's Day).

Palladium has been seeing strong demand in the manufacturing of industrial products. The metal is used for catalytic converters in gasoline-powered cars. Catalytic converters transform harmful gases, including hydrocarbons, carbon monoxide and nitrogen dioxide, to more benign nitrogen, carbon dioxide and water vapor. The demand for the metal is expected to keep rising as emission standards get more rigid in countries like India, Europe, China and Japan. In fact, China is seeing a surge in demand for palladium due to implementation of nationwide emissions standard in 2020. According to analysts at Morgan Stanley, China that is the largest auto market, will necessitate each vehicle to contain around 30% more palladium, platinum and rhodium from 2020.

Meanwhile, markets have been long grappling with a supply crunch of palladium. In fact, at the current level of supplies, market demand for the metal remains unmet. Moreover, analysts expect the palladium market to continue to witness supply shortage.  In fact, the global palladium market witnessed a shortfall of 600,000 ounces in 2018. Going on, Chris Griffith, CEO of Anglo American Platinum has commented that palladium’s supply deficit will widen from 1.1 million ounce-deficit in 2019 to 1.9 million ounces this year.

Will the Rally Continue?

The coronavirus outbreak has led to concerns over global economic outlook. Per Moody’s Analytics and Barclays, the coronavirus outbreak will dent global GDP by 0.3% in 2020. Meanwhile, analysts at Oxford Economics  predict a 0.2% drop in the current year. In fact, China witnessed a 22% decline in car sales in January. Going on, the China Passenger Car Association has predicted car sales decline of more than 30% in February. Thus, the slowing global growth due to the coronavirus eruption can lead to a slump in auto industry and therefore, declining palladium demand.

In this regard, Suki Cooper, precious metals analyst at Standard Chartered Bank, has commented that, “suspended operations could create a short-term bottleneck and a temporary dip in demand” for palladium. Moreover, analysts at Citigroup Inc. are predicting a drop in palladium prices to $2,100 an ounce in the near term if demand for automobiles continues to weaken due to the coronavirus outbreak. However, worsening of conditions can result in a further drop in palladium prices to $1,600 an ounce (read: ETF Areas That Can Stay Strong Amid Covid-19 Outbreak).

Palladium ETF in Focus

PALL reflects the performance of the price of palladium, less Trust's expenses. The shares are designed for investors who want a cost-effective and convenient way to invest in physical palladium. PALL charges 60 basis points in fees every year and has AUM of $412.3 million (see all Precious Metals ETFs here).

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