Palladium slide exaggerated, short-covering and bargain hunting likely

Otmane El Rhazi from The Bullion Desk.

Palladium’s recent price fall is exaggerated and there is now room for short-covering and bargain hunting, market participants said.

The metal fell to a low of $530 this morning – its cheapest since September 2010 – and was last at $550/555 per ounce, down $16 on Monday’s close.

Palladium prices have fallen 15 percent since Friday’s opening level – it is the hardest hit of the precious metals in the global crash that was triggered by renewed fears about the slowing Chinese economy.

“[But] the extent of the price slide is exaggerated – after all, demand will grow this year despite a slowdown in the automotive industry,” Commerzbank said in a note, attributing the fall in the metal’s price mainly to speculative selling.

The price fall has also attracted some buying, FastMarkets head of research William Adams said.

“We feel prices are extremely oversold so would not be surprised by a meaningful rebound on short-covering and bargain hunting,” he noted. “The market is nervous and the trend is still bearish. At some stage we expect a strong rebound but will now wait for the market to show its hand. It may be starting to do so today.”

As well, Nymex open interest in palladium has begun to fall off more rapidly, suggesting a degree of profit-taking by shorts is emerging, ICBC Standard Bank analyst Tom Kendall said.

Friday’s CFTC report showed short-covering started to show up while last week saw fresh buying by the longs for the first time in seven weeks.

“An aggressive short-covering rally is likely at some stage,” Adams noted.

In the last three weeks, physically backed palladium ETFs have recorded outflows of 50,000 ounces to stand at 3,013,212 ounces, according to today’s data. Since the start of the quarter, however, they have seen net inflows of 15,000 ounces and have recovered from their March lows.

Still, some market participants remain cautious about the metal’s prospects.

“Although the tentative rebuilding of long positions is encouraging, persistent price weakness continues to warrant caution especially amid concerns about China, which palladium in particular is more exposed to,” UBS said.

In July, car sales in China declined for the fourth consecutive month. Such a long period of weakness was seen last of 2009, Heraeus noted.

(Editing by Mark Shaw)

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