Palladium Price Analysis: XPD/USD pulls back sharply session highs above $2100

Spot palladium has undergone a sharp drop in recent trade, pulling back aggressively from monthly highs just to the north of the $2100/oz level to the $2020s. Spot prices are currently about 2.5% lower on the day. The drop puts XPD/USD prices back below both its 50-day moving average (DMA) at $2064 and its 21DMA at $2044. For now, prices have found support at an uptrend that has been in play since the end of October, but should prices break below this uptrend (and the psychologically important $2000 level), that would open the door to a move towards October lows in the $1940s (more than 4% down from current levels).

The sudden pullback from highs comes despite a steady US dollar (the DXY is flat close to 94.00) and a sharp drop in US real yields (10-year TIPS yields are down over 9bps on the day and hoving just above record lows in just above -1.20%). Declining real yields reduces the opportunity cost of holding precious metals and thus is typically associated with stronger precious metal prices.

The reason for palladium’s underperformance on Tuesday may have something to do with the fact that, while the metal is classed as a precious metal, the majority of its demand (some 80%) is linked to auto-production. Automakers use palladium in exhaust systems to neutralise the harmful elements in emissions. Most industrial metal prices fell on Tuesday, with the Bloomberg Industrial Metal Subindex dropping 0.9%.

Palladium prices have pulled back by roughly 33% from record highs levels set back in May primarily as a result of the impact of the chip shortage on auto production. As the chip shortage eases, this should boost demand for the precious metal. A poll conducted by Reuters at the end of November showed XPD/USD is expected to average $2050/oz in Q4 and $2150/oz in 2022. Analysts are not bullish on palladium’s longer-term prospects given the expected phasing out of combustion engine production.