London 21/11/2016 - Key notes:
- The net long fund position (NLFP) in platinum tumbled but that in palladium climbed over the reporting period (November 8-15).
- We expect speculative buying to emerge in platinum in December because the positive micro will eventually offset the current confluence of negative macro forces against the precious metals sector.
- We expect speculative buying to continue in palladium because investors may continue to play the "Trump reflation" trade. Still, we cannot exclude some bouts of profit-taking after the such run-up in prices since the start of the month.
Platinum spec positioning
The NLFP in platinum tumbled for the first time in three weeks over November 8-15. It now stands at 24,691 contracts, down 4,928 contracts or 17% from the previous week. Open interest moved 5% lower to 63,255 contracts over the reporting period while Nymex platinum prices slumped nearly 6%. The combination of lower open interest and lower prices does not offer a clear market configuration.
The fall in the NLFP was mainly driven by long liquidation of 3,961 contracts that was reinforced by short accumulation of 967 contracts.
Although speculative positioning deteriorated, fresh selling was not the driving force, leading us to believe that sentiment has not materially worsened. Instead, we believe that speculators were forced to unwind their long positioning due to the resurgence of negative macro forces against the precious metals (i.e. a stronger dollar and higher US real rates) following Trump’s victory in the US.
Although this long liquidation may continue for some time, the NLFP at 24,691 contracts is close to its long-term average of 22,261 contracts - it is broadly unchanged from its level at the start of the year.
Looking ahead, we think a short-covering rally will emerge, probably in December, because the positive micro will eventually more than offset the negative macro. Johnson Matthey expects a 422,000-oz supply deficit in 2016 although a return to a surplus in 2017 is possible due to a possible surge in autocatalyst recycling activity.
Palladium spec positioning
The NLFP in palladium climbed for a second consecutive week over November 8-15. It is now at 9,130 contracts, up 2,845 contracts or 45% from the previous week, but remains down 42% from its 2016 peak early in August. Short-covering of 1,830 contracts and long accumulation of 1,015 contracts were behind the rise.
Open interest moved 4% higher to 23,177 contracts over the reporting period while palladium prices jumped another 6.5%. The combination of firmer open interest and stronger prices is a clearly bullish set-up.
Contrary to platinum and other precious metals, palladium is ignoring the dollar rally and the surge in US real rates caused by the unexpected Trump victory and the reflation-price environment that has since emerged. This is partly due to the fact that palladium gets its pricing from industrial metals, which have by and large performed strongly so far this month.
But palladium, up 17% so far in November, has outperformed all metals this month, including copper, which is up 12%. We think this is because the speculative positioning in Nymex palladium was fairly bearish whereas in other metals it was already strongly bullish, making the reversal of speculative sentiment in palladium much more pronounced. The NLFP is now at a normal level judging by historical standards, up 17% in the year to date.
Looking ahead, we think investors may continue to play the “Trump reflation” game, which should underpin speculative buying in favour of palladium. But considering the sharp run-up in palladium prices, we would not be surprised by profit-taking late in December, perhaps caused by a resurgence of volatility across financial markets.
(Editing by Mark Shaw)