Precious metals will buckle as demand sags

When it comes to precious metals, gold gets most of the attention. But over the past few months it has been outshone by platinum and palladium.

Platinum has jumped by around 40% in the past year to a two-year high of around $1,600 an ounce. Palladium has more than doubled to a 25-month high of $550 an ounce. Both metals are essentially plays on the global economy. The car industry which uses the metals in catalytic converters accounts for more than half the worldwide demand. Palladium is mostly used in catalysts for petrol cars, while platinum is mostly applied to diesel converters. Other industrial uses and jewellery consume the rest.

A strong rebound in the global car sector is the key driver of recent gains. Production jumped by more than 10% in nine of the world's biggest car markets, notes PricewaterhouseCoopers, while Barclays Capital points to a 56% annual increase in Chinese car sales in March, with China's palladium imports up almost 100% that month. Recently launched exchange-traded funds (ETFs) in both metals, meanwhile, have spurred investment demand. Palladium ETF holdings have grown by 47% since January.

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But while China and India are "huge markets" for jewellery and autocatalysts in future, as Norilsk's Anton Berlin notes, the rally looks overdone. Philip Newman of GFMS says "there is a disconnect" between car demand and the price of the metals, which implies that a disappointing, soggy recovery could prompt the ETF investors propping up the price to flee. Even RBS, which remains broadly bullish, reckons the two metals are set to "pause for breath" for the rest of the year after their strong run.