High palladium ETF sales point to yet-to-be-defined industry development

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Historically, precious metals were considered a relatively opaque commodity sector, but the advent of precious-metal Exchange Traded Funds (ETFs) has provided a valuable indicator of underlying price and volume demand in this previously hard-to-grasp industry.

According to Johann Erasmus, Head CIB Wealth at Standard Bank, ETFs are used to track and predict broader industry developments, especially in the gold, platinum, palladium and rhodium industries. Using ETFs as a barometer to better understand, for example, the platinum-group metals (PGM) sector has worked extremely well – until now.

Currently, the USD prices of gold, platinum, palladium and rhodium are rising. Subsequently, trading volumes of these precious metal ETFs are increasing. The volume movement of gold ETFs mirror its traditional status as a safe investment, and their current high pricings and strong growth reflect the insecurity gripping developed markets in the wake of Trump’s election and Brexit. The outlier, however, is palladium.

Despite the USD palladium price being near two-year highs, the mass sell-off of palladium ETFs by investors is bucking the trend. Initially, South African institutional investors sold some holdings in the last quarter of 2016, followed by European investors in 2017. This raises some questions.

While the high prices of palladium in ZAR, GBP and EUR could account for some of the sell-off, profit taking might not be the only explanation if one considers that the volume of ETFs sold accounted for almost half the total volume of palladium ounces held in ETFs.

An alternative explanation could be attributed to institutional investors rotating some funds into general commodities stocks, currently perceived as good value in a rising market. But this doesn’t explain why European investors would do the same; USD palladium values are increasing, and any adjustment in US interest rates (making US equities more attractive) are only likely in March, if at all in 2017. Furthermore, the demand for palladium is expected to increase should the United States enter a period of strong growth.

Finally, since the autocatalytic industry can substitute rhodium for some palladium, sustained higher palladium prices have seen a slight uptick in rhodium prices, and a small rotation into rhodium ETFs. But again, this doesn’t explain the huge sell-off of palladium ETFs.

According to Erasmus, 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 amongst PGMs. He expects to observe the explanation for the precious metal’s outlier status in the short term.

The efficacy of PGM and gold ETFs in monitoring broader industry and economic trends aside, “ETFs remain one of the best and safest vehicles for investors to participate in the PGM and gold market - without the risk, expense, time costs and legal hurdles of holding and trading physical metal,” says Erasmus.