Palladium Outperforming Precious Metals
Precious metals across the board have performed well in 2009, but I note that gold and silver have underperformed relative to platinum and especially palladium. As illustrated by the chart, palladium has outperformed, up 49% since January, followed by platinum (up by 30%), silver (up 23%) and gold (up 8%). This relative performance, I believe, comes on the back of several dynamics.
Relative Perfomance of Precious Metals (Rebased, 100 = Jan 2009)
First, base effects are playing their part. While gold and silver did sell off towards the end of 2008, they had rallied significantly before then, and did not decline as sharply as platinum and palladium. As such, these metals have had much catching up to do once the rally took hold.
Second, platinum, palladium and to a lesser degree silver are used for industrial purposes. In 2008, autocatalyst demand accounted for approximately 46% of all platinum demand and 63% of all palladium demand. And despite a weak auto sector in developed countries, growth in the sector remains strong in emerging markets, with China leading the way. According to the China Association of Automobile Manufacturers (CAAM), automobile production was up by a stellar 37.7% y-o-y in June. While some of this growth is on the back of government schemes to promote car sales, it also represents a structural shift towards Chinese demand for these precious metals. Indeed, in 2008 China was the single largest consumer of palladium and second largest consumer of platinum. With Chinese economic activity expected to remain buoyant in coming quarters, this will continue to place demand pressure on platinum and palladium.
Third, financial markets have stabilized substantially in recent months and despite the reflation of equity markets, deflationary pressures are still present with y-o-y inflation readings still in negative territory for various countries. As such, the risk of very high inflation should remain abated for some time.