Hedge Funds Set their Sights on Palladium

Source: Financial Times, Jack Farchy and Gregory Meyer (10/27/10)

"Russian stockpiles will likely determine if palladium can rise to $1,000."

Palladium prices surged to a fresh nine-year high as hedge funds piled into the market, convinced of the prospect of higher prices.

"The fund community has been a fan of palladium for some time,” said Edel Tully, precious metals strategist at UBS in London. Fund buying helped the precious metal rise 2.9% to $624.55 a troy ounce on Tuesday, the highest since June 2001 and the second new peak in two days. Palladium has risen 55% since the start of the year.

Through exchange traded funds (ETFs) investors have bought 96,900 ounces of palladium so far this month, while speculators' positions on the Nymex futures exchange are at near-record bullish levels.

But analysts believe palladium is also supported by robust supply and demand fundamentals, given their use in the auto industry and emerging markets.

At the same time, the supply side response could be muted. Crucially, some are speculating that the Russian government's stockpiles of palladium, accumulated over 50 years when it was mined as a byproduct for which little use could be found, may have dried up. Sales from the Russian government have added about 1m ounces of palladium supply annually in recent years.

The outlook for sales from Russian government stockpiles "will most likely be the primary determinant of whether palladium can rise to $1,000 over the medium term," Ms. Tully said, adding that for now it remains "a wild card."

But some believe Moscow has little palladium left. Victor Sprogis, deputy chief executive of Norilsk Nickel, the Russian-based miner that is the world's largest producer of palladium and nickel, said earlier this month that he expected the government stocks to be "finished" next year.

"This year will be the last year when any substantial quantity [of] this stock has any chance to enter the market," he said.

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