For palladium, the new year started as the old year ended. Prices climbed to new record highs above $1,330 per ounce this morning, benefiting from signs of progress in trade talks between the United States and China as well as news of a potential consumption stimulus programme in China, targeting household appliances and cars.

Palladium is primarily used in catalysts of gasoline-fuelled cars, making up more than 75 percent of total demand. China’s car market exhibited major weakness last year and sales likely dropped for the first time in three decades, suffering from falling consumer confidence and a crackdown on car financing.

As palladium prices continued to climb despite this weakness, we believe the market already reflected hopes of such a stimulus programme. Other than a focus on China’s rural areas, where car ownership rates are well below urban areas, no details on the potential programme were provided. If introduced, this would be the third programme of the last decade.

While lifting sentiment and sales in the short-term, it would draw even more future demand into the present and weigh on the long-term growth outlook of the Chinese car market.

Considering the strong growth of electric vehicles in China, sales of conventional cars are on track to level off during the next five years. Against the backdrop of the prevailing positive sentiment in the palladium market, its small size and lack of liquidity, short-term price risks still seem skewed to the upside.

While we remain convinced that these price levels are not sustainable in the medium to longer term, we prefer staying out of the market due to an unfavourable risk/reward relationship. We lift our 3- and 12- month price targets to $1,250 and $1,000 per ounce.


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