Mike McGlone Special Contributor to Kitco News
Monday May 23, 2016 08:38
(Kitco News) - Palladium is the most industrial of the precious metals, gold is the least. For much of the post 2008 crisis period, palladium was the stud among the precious metals. Palladium rallied on the back of strong demand, notably on incremental increases from emerging markets (China), increasing emission controls and constrained supplies from South Africa and Russia. Palladium is the primary emission control catalyst for gasoline vehicles. Demand for palladium is about 90% from industrial sources, compared to less than 10% for gold. The palladium/gold ratio can be considered a similar leading economic indicator as the silver/gold ratio, but palladium/gold is more sensitive to global economic activity albeit subject to more concentrated supply spikes. Pressuring palladium recently, global vehicle sales stalled in 2015 to only +1.9%, which was the smallest increase since 2009.
The palladium/gold ratio has had a strong tendency to move in a similar trending pattern as the stock market and global GDP. The featured chart depicts the plunge in the palladium/gold ratio from the peak in March of 2015 at .70 to the current level near .44. Although S&P 500 volatility has increased some since March of 2015, the index is not far below the March of 2015 average at 2,070. Is it just another ominous economic indicator, an indication of the relative attractive value of palladium versus gold and/or the relative unattractiveness of the S&P 500? Time will tell, but as the stock market faces increasing headwinds amidst the resumption of hawkish Federal Reserve (Fed) rhetoric, upside for the primary asset class appears limited. If the stock market does return the beginning of the year mean reversion, many will note that the plunging palladium/gold ratio was an early warning and gold should be among the primary beneficiaries.
An early warning of the stock markets next move may come from the NASDAQ 100, tracked by the widely traded QQQ ETF. QQQ has been stuck in a narrow range the past three weeks, between resistance near the 50-week moving average and support near the 100-week moving average. When it breaks out of that range (about 104.5 to 107.5), it should have repercussions for Fed policy and precious metals investors, currently highly subject to Fed tightening expectations.
The gold/palladium ratio has trended in a similar pattern as the S&P 500
Special Contributor to Kitco News