Palladium took a dive this week, and Chen Lin, author of the popular newsletter What Is Chen Buying, What Is Chen Selling?, explains what happened and how investors can profit from the drop.
This is President Trump’s first week in office and a huge week for the stock market. However, not many noticed the palladium futures market experienced the “violent, stunning, historic collapse,” according to the well-known market commentator Dennis Gartman, the “commodity king.” Let’s drill down to exactly what happened.
On Dec. 23, 2016, under tremendous public pressure, the Chinese government announced that by July 1, 2020, all vehicles in the Chinese market will have to comply to the tough China VI/China 6 standard, basically equivalent to the current U.S. and E.U. standards. It was barely noticed in the West because of the Christmas holiday. But it was a big one in China, especially in the Chinese social media. I could hear the cheers of Chinese citizens all the way in the U.S.!
China is facing a severe pollution problem, especially in the northern regions. There are studies pointing to car emission as one of the major sources of pollution. However, the Chinese government has been reluctant to implement tougher car emission standards. One of the key reasons, I was told by various Chinese sources, is that the world will not have enough palladium supply for China if China implements U.S. or E.U. style emission standards!
Let’s look at the supply demands in the palladium market (see chart above). You can see mining supply (primary supply) has been down for many years thanks to the underinvestment in South Africa, the main supplier of platinum and palladium.
As a matter of fact, if there was not heavy ETF redemption in the past two years, palladium couldn’t have reached the supply-demand balance!
We saw heavy ETF …read more