Buying (Going Long) Palladium Futures to Profit from a Rise in Palladium Prices

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Buying (Going Long) Palladium Futures to Profit from a Rise in Palladium Prices

If you are bullish on palladium, you can profit from a rise in palladium price by taking up a long position in the palladium futures market. You can do so by buying (going long) one or more palladium futures contracts at a futures exchange.

Example: Long Palladium Futures Trade

You decide to go long one near-month NYMEX Palladium Futures contract at the price of USD 185.40 per troy ounce. Since each NYMEX Palladium Futures contract represents 100 troy ounces of palladium, the value of the futures contract is USD 18,540. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 2,750 to open the long futures position.

Assuming that a week later, the price of palladium rises and correspondingly, the price of palladium futures jumps to USD 203.94 per troy ounce. Each contract is now worth USD 20,394. So by selling your futures contract now, you can exit your long position in palladium futures with a profit of USD 1,854.

Long Palladium Futures Strategy: Buy LOW, Sell HIGH
BUY 100 troy ounces of palladium at USD 185.40/oz USD 18,540
SELL 100 troy ounces of palladium at USD 203.94/oz USD 20,394
Profit USD 1,854
Investment (Initial Margin) USD 2,750
Return on Investment 67%

Margin Requirements & Leverage

In the examples shown above, although palladium prices have moved by only 10%, the ROI generated is 67%. This leverage is made possible by the relatively low margin (approximately 15%) required to control a large amount of palladium represented by each contract.

Leverage is a double edged weapon. The above examples only depict positive scenarios whereby the market is favorable towards you. If the market turn against you, you will be required to top up your account to meet the margin requirements in order for your futures position to remain open.

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News Bites

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Editor’s Note: Kitco News has officially launched Outlook 2020 -В Rush To SafetyВ – theВ definitive reference for precious metals investors for the new year.В We chose this year’s theme as financial markets face growing uncertainty. With volatility on the rise, how do you protect yourself? Click here daily to see updated content.

(Kitco News) – Platinum is likely to start spreading its wings in 2020, while sister metal palladium is expected to continue flying high although it may descend to a slightly lower elevation, analysts say.

Palladium was widely considered to be in an annual supply/demand deficit in 2020, enabling prices to run to record highs late in the year in a market when the availability of metal was described as tight. Sister metal platinum languished under a supply/demand surplus, however, and prices are heading toward a loss for the year.

As of 9:14 a.m. EST Tuesday, spot palladium was trading at $1,259.40 an ounce, which was up 19% for the year to date. Platinum was at $785.80, losing 15% for the year so far.

Palladium is expected to remain in a deficit in 2020 and has the strongest supply/demand fundamentals, said Suki Cooper, precious-metals analyst with Standard Chartered, in an interview with Kitco News. Nevertheless, Cooper and others said prices may back down from current levels on profit-taking in the not-too-distant future, although they are expected to remain historically strong.

“We expect the palladium market to be undersupplied not only in 2020 but in 2020 as well,” Cooper said. “In the near term, we might see some profit taking given that speculative [bullish] positioning remains quite high. So we would expect to see a correction in the near term. But supply pressures are going to remain.”

Standard Chartered forecast a palladium supply/demand deficit of 756,000 ounces in 2020.

“I think current palladium prices are running a little bit ahead of demand expectations for 2020,” said KC Chang, senior economist who tracks platinum and palladium for consultancy IHS Markit. “So for palladium, I see prices moving back toward [an average of] $1,000 a troy ounce in 2020.”

Standard Chartered looks for palladium to end 2020 at $1,100 an ounce and average $1,058 for the full year. ABN AMRO listed an average forecast of $1,056 an ounce for next year, with a high of $1,125 in the first quarter, falling to $1,000 by the fourth. Natixis listed a full-year average forecast of $1,015. Commerzbank and Capital Economics both predicted a pullback to around $1,000 in the first half of the year on ideas that auto demand has either hit a plateau or will ease. However, by the end of 2020, Commerzbank sees palladium recovering to $1,100.

“We maintain our view that palladium prices should correct,” said Bernard Dahdah precious metals analyst at Natixis.

The main use for palladium is automotive catalytic converters. Markets have factored in strong car sales for the key markets of the U.S. and China, Chang said. However, Chang said both are starting to show signs of flatlining. In fact, Dahdah pointed out that Chinese new automobile sales dropped at their steepest pace in nearly seven years, slumping 14% year-on-year in November, which continued the downward trend that started in July. Meanwhile, he continued, U.S. new automobile sales were largely flat from January and November at around a 15.6 million rate.

“At around 80% of total demand for palladium, the metal is heavily reliant on the automobile sector and expectations are that 2020 will be a worse year for car sales in the U.S. and China,” Dahdah said.

Commerzbank said palladium “risks becoming a victim of its own success” since its now-steep price premium over platinum could mean some substitution toward platinum instead in catalytic converters. Still, analysts listed factors that will limit the metal’s downside, including stricter emissions standards.

“Palladium is a story that has been driven both by the supply side and the demand picture,” Cooper said. “On the supply side, there is very limited opportunity for additional growth. If you look at the scope for any major projects, most of them are not likely to come on line in the next two to three years.”

There is some supply growth in recycled metal, yet there also constraints for this, she continued.

“Even though we’ve seen a slowdown in auto sales of China and the U.S., the tighter emissions legislation that has been implemented globally has meant that average palladium loadings have continued to rise,” Cooper said.

The main risk for palladium prices would be if automakers started using more platinum in place of palladium, Cooper said. Historically, palladium was used for gasoline-powered cars since it was cheaper, although palladium became more expensive than platinum in the last few months of 2020. Still, Cooper doubts much substitution will occur in the near future, pointing out there was not a big immediate switchover when palladium prices last soared above platinum back around the turn of the millennium.Instead, there was significant thrifting of palladium, and growth in the use of platinum in diesel vehicles.

“We still think a substitution risk is 18 months away,” Cooper said, although adding that some could occur on a small scale.

Cooper pointed out that palladium remains in backwardation, which is a sign of tight supplies. This when prices of nearby contracts are more expensive than deferred prices in any commodity, meaning users are willing to pay a premium to get ahold of the commodity right away.

Platinum Seen Recovering Lost Ground

Two factors have hurt platinum demand, Cooper explained. Diesel-powered cars require platinum but have been losing market share. Also, platinum-jewelry demand has softened, particularly in key consumer China.

Still, most analysts look for prices to improve.

Standard Chartered looks for platinum to rise to an average of $930 for full-year 2020 and end next year around $960. The bank looks for the supply/demand surplus to fall from 406,000 ounces in 2020 to 253,000 ounces in 2020.

Chang expects the global supply surplus to contract some in 2020 to between 300,000 to 400,000 ounces, compared to an estimated 500,000 ounces for 2020. Chang looks for supply growth of only 1% to 2% in 2020, while demand is also seen rising around 1%.

“Platinum is historically cheap both in absolute terms and relative to gold and palladium, suggesting a price rise,” said an outlook report from Commerzbank. “That said, the sizeable oversupply will limit its recovery potential.”

Chang said that he looks for platinum to rise to an average price of just above $900 an ounce in 2020. ABN AMRO listed a $988 forecast average, with a low of $875 in the first quarter, rising to $988 by the fourth. Commerzbank sees platinum rising from $800 in the first quarter to $900 by the end of 2020. Natixis put its full-year average forecast at $875.

“My main factor on why platinum prices will move higher in the next 12 months is there will be more supply-side support,” Chang said. “When platinum prices are in the $800- to $900-a-troy-ounce range, that limits the amount of production that is being brought forward….I think that does provide upward price pressure for platinum as we go into 2020.”

Chang sees potential weakness in South African mine supply in 2020, although this hinges on factors such as any negotiations between producers and unions. Chang pointed out that companies have idled some unprofitable mine shafts.

“We could see a modest rebound in [demand from] the automotive market,” especially if some auto manufacturers start substituting platinum for palladium,” Chang said.

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