UBS Global Research Maintains Bearish Stance on Palladium Despite ETF Surge
In a recent report, UBS Global Research has reiterated its pessimistic outlook on palladium, even as ETF investments in the metal hit a five-year high in 2024. The firm remains skeptical about the long-term strength of palladium prices, despite an increase in ETF holdings by approximately 138,000 ounces this year.
The total ETF holdings now stand at 546,000 ounces, the highest level since early 2019, but still significantly lower than the peaks seen in 2014 and 2015. Analysts at UBS attribute the recent inflows mainly to European investors catching up with other precious metals, as opposed to South African investors, who played a bigger role in influencing flows in 2023.
The surge in European demand may be driven by palladium's recent underperformance compared to other precious metals, leading some investors to bet on a potential catch-up. There are also expectations of undersupply in the market this year, fueling the increased demand.
However, UBS warns of structural challenges in the automotive sector, which is the largest end-use market for palladium. The global automotive industry is expected to produce fewer vehicles this year, reducing the demand for palladium in catalytic converters for gasoline engines. Additionally, the substitution of palladium with platinum in autocatalysts poses a long-term threat to palladium's market position.
UBS analysts predict that palladium prices will hover around $900 per ounce over the next 12 months, reflecting expectations of a slightly oversupplied market. While some investors may be hopeful for a short-term rebound, UBS remains cautious, highlighting the persistent structural challenges facing palladium.
Analysis:
In summary, UBS Global Research is maintaining a bearish outlook on palladium due to structural challenges in the automotive sector and the ongoing substitution of palladium with platinum in autocatalysts. Despite a surge in ETF investments and expectations of undersupply, the firm predicts that palladium prices will remain around $900 per ounce over the next year. This information is crucial for investors looking to understand the factors influencing palladium prices and the potential risks associated with investing in this metal.