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Large moves in Palladium ETFs confuse investors

Large moves in Palladium ETFs confuse investors

Cape Town – Johann Erasmus, Head of CIB Wealth, a division in Standard Bank said this week that precious metal Exchange Traded Funds (ETFs) have evolved into a market barometer for underlying investor demand and a potential window into future metal demand and prices.

Although historically, precious metals were considered a relatively opaque commodity sector, the advent of ETFs has provided a viewable indicator of the underlying price and volume demand.

“ETFs are used to track and predict broader industry changes and developments, especially in the gold, platinum, palladium and rhodium industries,” said Erasmus.

Using ETFs as a barometer to better understand, for example, platinum group metals has worked extremely well, “up till now,” he said.

Currently the US Dollar prices of gold, platinum, palladium and rhodium are rising. As expected, trading volumes of gold, platinum and rhodium ETFs are slowly increasing in line with the price increases as investors become more active in executing their views for the underlying metals future price movements.

The volume movement of gold ETFs mirror its traditional status as a safe haven. Unsurprisingly, current high pricings and strong growth of gold ETFs correctly reflect both the insecurity and unpredictability gripping developed markets in the wake of Trump’s election and Brexit. The outlier, however, is palladium.

Despite the US Dollar palladium price being near two-year highs, the recent mass sell-off in palladium ETFs is bucking the trend. For instance, South African institutional investors sold some holdings in the last quarter of 2016. This was followed by European institutional investors dumping palladium ETFs this year. This signals that there are perceived developments in palladium which do not feature on the public radar yet.

“While the high prices of palladium in Rand, Pound and Euro could account for some of the sell-off, when one considers that the volume of ETFs sold by institutional investors accounted for almost half the total volume of palladium ounces held in ETFs, profit taking might not be the only explanation,” said Erasmus.

An alternative explanation for the broad sell-off by South African institutional investors, may be that they are rotating some funds into general commodities stocks, currently perceived as good value in a rising market. This does not, however, explain why European institutional investors would do the same – three months later. “Dollar palladium values are increasing, and any adjustment in US interest rates, making US equities a more attractive bet, is only likely in March – if at all in 2017,” he speculated.

The demand for palladium is expected to increase should the United States enter a period of strong growth and now might not be the right time to unload palladium ETFs in such large volumes.

Palladium is used extensively in automotive manufacturing for so-called catalytic convertors but rhodium is a natural substitute for palladium so sustained higher palladium prices have to some extent seen a slight uptick in rhodium prices. This lead to a small shift into rhodium ETFs. But Erasmus pointed out that this still does not explain the huge palladium ETF sell-off.

The fact that this anomaly is so puzzling reflects the extent to which analysts view ETF pricing and volume movements as the bellwether of broader industry trends, especially in the palladium group metals, according to Erasmus.

Still, “ETFs remain one of the best, and safest, vehicles for investors to participate in the Palladium Group Metals and gold market – without the risk, expense, time costs and legal hurdles of holding and trading physical metal,” he concluded.

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