Palladium has been behaving in an absolutely hectic manner so far in 2020, but on the other hand it has been a great investment asset, offering many opportunities. Palladium is another shiny metal which is considered as both a commodity, thus a risk asset at times, as well as a safe haven. It is used in a wide range of products in the automotive and electronics industries and for jewelry, which means that both the demand and the price increase when the global economy is doing well. On the other hand, it is a rare commodity, 30 times rarer than gold, which makes it a safe haven in times of uncertainty, and it has indeed acted as such in recent times. In fact, palladium surged higher during the first two months of this year, as the coronavirus epidemic broke out in Wuhan, rose nearly $ 1,000, surpassing the price of gold and getting close to the $ 2,900 mark, from around $ 1,900 at the end of 2019. So in general, palladium has only increased in value – be it in times of economic boom or economic doom – both as a commodity, where the demand will continue to increase, and as a safe haven. Palladium was a great investment fundamentally, when the tariff tit for tat between the US and China started, it was a great investment in summer last year, before the big surge, and it was a good investment technically, at the beginning of this month, after the pullback from the surge. But, the amazing trading opportunities don’t seem to end with palladium, so we will get active trading the XPD/USD.

Palladium traded at around $ 200-$ 300 until the end of the 1990s, when it made a strong bullish move, partly driven by its increased use in the computer dotcom industry, which surged during that period. It then breached above the big round number of $ 1,000 for the first time, but it returned to its normal range again in the early 2000s. During the 2008 crisis, palladium didn’t surge as much as gold did, and it traded in a slow but steady uptrend until 2008, which showed that it was increasing in value as a commodity in demand, as the global economy was rebounding from the economic crisis of 2008-09. But the US-China trade tariffs have sent it climbing higher since 2018, as it became clear that a trade war was underway. Palladium began acting as a safe haven, turning extremely bullish during uncertain times. This proved particularly true as the XPD/USD surged during January and February 2020, when the coronavirus pandemic hit China. It trembled during March and April, but resumed its uptrend in July, confirming its safe haven status. So, when we trade palladium, we should first confirm whether it is behaving as a commodity or as a safe haven – although this is a long term switch, so we don’t have to make any fast decisions.

Palladium Price Prediction for the Next 5 Years

As with most financial assets right now, there is a new trading environment for palladium, and in the short to medium term, this isn’t going to change much. Assets like this are all being affected by the coronavirus pandemic and the daily news releases, which keep messing with the sentiment in financial markets. The USD has been in a freefall for some time, which has been keeping risk assets and safe havens well bid, with palladium turning bullish again in July. But the situation might change very quickly. The US economy contracted the most during the lockdown, but it has been rebounding nicely since May, although there are glitches and uncertainties. But if these glitches go away, the USD will probably turn bullish, which will be a negative factor for the XPD/USD. The risk sentiment keeps flipping around, while geopolitical and trade tensions are likely to keep safe havens like palladium in the bid. The demand is also expected to increase, especially in the automotive industry, and the weekly and monthly charts are pointing higher, so the long term analysis for palladium seems positive. 

COVID-19 Pandemic – Risk Sentiment 

The COVID-19 crisis had severe implications for platinum-group metals. Both supply and demand were harshly affected by the widespread lockdowns that were imposed to curb the spread of the virus, and this had a massive impact on the world economy. The rapid spread of COVID-19 in Europe, the USA, the Middle East, China and the rest of Asia caused palladium prices to fall by more than a 10%. The lockdowns affected the global supply chain and the automotive sector worldwide, ultimately affecting the palladium prices. However, the sentiment surrounding palladium has been positive during most of the last decade, with prices increasing sharply in 2019 and 2020, and by almost 80% in the past six months, to a record high of more than US $ 2,800 per ounce. Since the beginning of the year, investors have turned to safe-havens, and this sentiment has been sustained, due to fears of the second wave of the coronavirus. As a result, the global equity market often moves lower, while trading in safe havens, like the US dollar and palladium, remains bullish.

As we all know, the long-awaiting trade deal between the US and China, which was signed earlier this year, also boosted prices. Traders expect this agreement to help ease downward pressure on global economic growth and slow the decline in Chinese car sales. But for now, the coronavirus pandemic is the big, bad wolf, so until it is over, the other issues won’t matter that much – they will only have an impact on the risk sentiment if the coronavirus retreats. 

Will the Palladium Demand Increase?

The use of palladium is set to intensify in vehicles with combustion motors, as automobile manufacturers scramble to meet stricter emission legislation in Europe and China, by increasing palladium, platinum and rhodium by at least 30% for three-way catalytic converters in most major vehicle markets. This would increase the demand to above 10 million ounces, despite slowing global economic growth and falling car sales in key markets like Europe, the US and China. As a result, prices are likely to remain high, as the supply will fail to keep up with the demand. Besides that, the 14% increase in palladium use in vehicles with combustion motors, boosted its demand to a record high of 9.7M ounces last year.

On the supply side, the primary supplies from mine production may fall slightly, as a result of rationalization at South African mines and the depletion of palladium-rich surface materials in Russia. However, the high prices of palladium will continue to drive up secondary recoveries from recycling, but this will not be sufficient to reduce the deficit in any meaningful way. A gaping supply deficit is likely to underpin prices, due to short and mid-term market uncertainties, as a result of the rapid spread of COVID-19 from China to the USA and rest of the world. A short-term negative impact on car sales in 2020, due to the economic slowdown, could also affect the palladium prices.

Geopolitical and Trade Tensions Will Probably Continue

The reason for the high degree of uncertainty in the market could also be attributed to the prolonged geopolitical and trade tensions between the US and the rest of the global economies. These include the European Union (EU), the UK and China. Furthermore, any activity that intensifies the US-China tussle, is likely to push palladium prices to record highs. Meanwhile, China and the US have fired fresh sanctions at each other, in the ongoing conflict. Both countries have expelled a number of the opposite country’s diplomats, amid mutual accusations of spying. China is also trying to take over Hong Kong, while the US has increased its military presence in the East China Sea, so the situation is not all that calm, despite the fake smiles for the photographers. This has caused palladium futures to climb to lifetime highs, as safe havens provide shelter in times of uncertainty. The Phase One Deal between the two countries doesn’t mean the end of the trade war either – the tussle between the economic giants will keep the safe havens in demand for the coming years, even after the coronavirus retreats, if the pandemic ends this year.

Stock Market Crash

The recent 2020 crash on the US stock exchange wasn’t only limited to the US. Rather, it was a global stock market crash that began on February 20, 2020. On February 12, the Dow Jones Industrial Average, the NASDAQ Composite, and the S&P 500 Index all finished at record highs (while the NASDAQ and S&P 500 reached subsequent record highs on February 19). From February 24 to 28, stock markets worldwide reported their largest one-week decline since the financial crisis of 2008. On March 9, most global markets reported severe declines, mainly triggered by the COVID-19 pandemic and an oil price war between Russia and the OPEC countries, led by Saudi Arabia. This became informally known as Black Monday. At the time, it was the worst drop in stocks since the Great Recession in 2008. The relationship between the palladium prices and the stock markets is inverse. Mostly, the palladium prices will drop when the stock markets are performing well and vice versa. Likewise, when the stock market collapses, the demand for palladium increases, as more and more investors are looking at safer options. Although, right now the USD is declining fast, which is keeping both safe havens and risk assets in demand, with palladium benefiting from both. 

XPD/USD Correlation

The correlation between the USD and palladium is not as strong as it is with gold or some other risk assets, but there is correlation nonetheless, since it is quoted in USD. Obviously, palladium has a mind of its own, switching from a safe haven to a commodity, but mostly benefiting from both, since the price has been increasing since 2009. While palladium has followed its path most of the time, in certain periods the USD has been the driver of the XPD/USD. From 2014 until 2016 the USD index surged, as shown in the DXY chart below.

DXY turns bullish first, then bearish

XPD/USD turned bearish first, then bullish

During the same period, the XPD/USD retreated lower, which means that the increase in the USD had a negative impact on the price of palladium. From 2016 until 2018 the DXY turned bearish, falling from 103 points to 88 points, and the XPD/USD increased from $ 480 to $ 1,140. During the shock of the first half of March 2020, the DXY surged from 94 points to 103 points, while palladium crashed lower, only for things to reverse in the coming months. So, when trading palladium during the coming months/years, we must keep an eye on the DXY, particularly during US elections later this year.  

Technical Analysis – Will the Bounce Off the 20 SMA Last?

Palladium it turning bearish, after retracing lower to the 20 SMA on the monthly chart

In the 1990s, palladium was trading in a range between $ 200 and $ 400, but it surged above $1,000 in the late ‘90s. Eventually, the price moved down again in the early 2000s, but that move above the $ 1,000 level was a psychological breakpoint, and the sentiment eventually turned bullish for palladium. The trend  for palladium was bullish and steady, from 2006 until September 2018, when the XPD/USD surged higher, as palladium traders realized that the trade tariffs between the US and China were going to be more than mere skirmishes and the global economy was going to suffer the effects. The XPD/USD surged from $ 900 to above $ 1,620 by March 2019, but the biggest climb was yet to come, starting from September 2019, when palladium, which was trading at $ 1,500s, jumped to $ 2,880, with the biggest increase coming in January and February 2020. Eventually, we saw a reverse during March, as was the case for most assets, and this also continued in April. The 20 SMA (gray) was pierced on the monthly XPD/USD chart, but the price returned back above that level in the same month, so it didn’t count as a break. This moving average held well during May and June, confirming itself as a support indicator on this time-frame. Incidentally, the candlesticks of the previous two months closed as dojis, which are bullish reversing signals, and the bullish reversal is already underway, now in July. The price has climbed from $ 1,880 to $ 2,208 so far this month, which means an increase in value of 15%. According to this monthly chart, palladium should continue its bullish momentum, now that the retrace lower is complete and the 20 SMA is holding as support.

 The 150 SMA has turned from resistance into support for the XPD/USD

Besides the monthly chart pointing up, the weekly chart also points up for palladium. The price has surged above all moving averages on this time-frame, and the 150 SMA turned into support immediately after it was broken. All of the last three candlesticks have relied on this moving average as support. The previous two weekly candlesticks closed as dojis, which in this case are bearish reversing signals after the climb, but the 150 SMA held as support, and this week the price moved higher again, forming quite a bullish candlestick. So, the technical analysis on both time-frame charts points up and the fundamentals are also mainly bullish for palladium, which makes it a good buying investment.