Driven by strong demand and tightened supply, the price of palladium has climbed nearly 30% over the past six weeks. It could become more valuable than gold for the first time in 16 years.
The surging price of palladium, which is widely used in automobile catalytic converters to make gas emissions less toxic, is typically a good sign for the auto industry since it could indicate stronger demand for automobiles.
But we are not seeing that lift this year. In fact, the S&P 500’sAutomobiles & Components industry group has sunk to its lowest level since February 2016. In fact, General Motors(GM) and Ford Motor(F) both slumped this week to new 52-week intraday lows.
The correlation between metals and the stock markets, while often watched by investors to get a hint of future movement, is often not so reliable, according to Jason Goepfert president of newsletter Sentiment Trader. This is especially true for palladium, wrote Goepfert in a note on Friday, since the price has been greatly driven up by the “smart money” hedgers.
Over the past 25 years, there were 16 times when the auto industry was in the bottom 5% of its three-month price range and palladium was in the top 5% of its own range, similar to what we are seeing today. However, historical data suggest that auto stocks haven’t been responding much to the palladium rally in the following months.
“The Auto sector within the S&P continued to lose ground in the weeks ahead, before showing a modest tendency to rebound over the next 1-3 months,” wrote Goepfert, “Even then, the risk/reward was poor, and ended up leading to negative returns most of the time over…six-12 months.”