The ETFS Physical Palladium Shares (NYSEArca: PALL) is up 37.5% year-to-date, good for one of the best performance among commodities exchange traded funds, but that is not motivating investors to stick around.
Auto sales are expected to hit another record in 2017 for the eighth consecutive year on rising demand in emerging markets and from those in the U.S. seeking to replace older vehicles as stronger global economic growth and low gas prices help support consumer demand.
“More than $49 million has left the two main U.S. and European palladium ETFs — the ETFS Physical Palladium Shares and the ZKB Palladium fund — or roughly 15 percent of assets through Aug. 21 this year, according to data compiled by Bloomberg,” reports Bloomberg. “Across all ETFs, holdings of palladium have plunged from around 3.1 million ounces in 2014 to 1.6 million ounces today. And that’s while the metal has risen 38 percent this year to its highest price since 2001.”
Along with its safe-haven link in the precious metals space, palladium is also more sensitive to economic cycles and enjoys heavy industrial demand, notably out of the automobile industry where the precious metal is used as an autocatalyst to remove harmful emission particles.
“The explanation for the outflows lies in part in the scarcity of physical palladium and a robust borrowing market that has developed among users and speculators. Most ETFs that track stocks or bonds are fairly predictable in that flows typically correspond with performance. For funds that hold exotic assets like palladium however, quirks in the underlying market can often lead to more unpredictable patterns,” according to Bloomberg.
Related: Choosing the Right Precious Metal ETF for the Right Job
Platinum and palladium will also benefit from positive spill overs from gold and silver in an extended negative real rate and range bound dollar environment. The improving global economy and stronger car demand, especially among European and Chinese consumers, will also drive industrial demand. Palladium is also benefiting from a weak dollar. Commodities are denominated in dollars and the dollar is one of the worst-performing major currencies this year.
Dwindling supplies are also helping palladium as the metal is again expected to be in a supply deficit this year.
“Supply is set to trail demand by the most in at least seven years, according to researcher Metals Focus, while inventories in warehouses tracked by the New York Mercantile Exchange have shrunk by 45 percent this year,” according to Bloomberg.
Russia and South Africa are the two largest palladium-producing nations.
For more information on the palladium market, visit our palladium category.