Last Update: December 18th, 2023

Palladium, which is both an industrial and a precious metal, has enjoyed a nice rally in the last 5 years, as the price kept surging from below $500 in 2016, to 3,018 by May 2021. The increasing demand for cleaner energy, lower emissions and more environmentally friendly cars has kept the demand for palladium high, since this metal is the main element in automotive catalytic converters, which reduce toxic emissions of nitrogen oxides, transforming them into less harmful gases in vehicle exhaust systems.

But, the semiconductor chip shortage, which led to lower autocatalytic demand, has been weighing on the palladium prices. The Federal Reserve has also shifted their monetary policy from extremely accommodative to hawkish, which has benefited the US Dollar, thus becoming another factor in the palladium decline since May 2021. The same factors are expected to affect the palladium prices in 2022, which means that the bearish pressure should persist, and the XPD/USD will keep trading below $2,000.

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Recent Changes in the Palladium Price

Palladium has been on a bullish trend since 2000, following commodity prices higher during this period, while in the last few years, it has been absolutely surging. The trade war between the US and China, from 2018 until 2020, turned the sentiment extremely positive for safe havens, making the situation even more bullish for palladium. The breakout of the coronavirus in China gave it a push above $2,000 in the first two months of 2020, and it reached $2,800 by February. We saw a quick reversal in March, as the coronavirus traveled all over the world, but the uptrend picked up again, as the global economy, and particularly manufacturing, surged higher from the summer of 2020.

The requirements for cleaner energy and cleaner vehicles have also increased, and this had a positive impact on palladium prices until May 2021. The halt in mining operations at Russian producer Nornickel’s Oktyabrsky and Taimyrsky also contributed to palladium reaching record levels above $3,000. That’s when the semiconductor chip shortage, which kept Palladium prices bearish until the end of 2021, began. These are the factors that have been affecting palladium in recent years, so let’s see what will drive this metal in 2022.

Overall, the coronavirus had a positive impact on palladium prices, except in a couple of months. During the pandemic, the manufacturing sector has been expanding pretty fast in western countries, and it is expected to keep up the pace. This, along with politics insisting on cleaner cars, has been keeping the demand for palladium at decent levels. Palladium is used to reduce toxic emissions in petrol cars, and it is also used in electric cars, so the demand for XPD will continue, as the world keeps heading in that direction. At the moment, the chip shortage is weighing on the palladium prices, and no one knows for sure how long this will last, but it seems like there’s some sort of battle going on. Once the chip shortage ends, palladium will have to go head on against the USD, and the bullish trend will resume again.

Higher Demand in the Automobile Industry

The world has embarked on a path towards cleaner energy, which has increased the demand for vehicles with combustion motors. This has been keeping the demand for palladium high, and the situation is expected to intensify further once the chip shortage has been resolved. The EU has passed the Green Deal, which aims to minimize carbon emissions and point the continent towards a cleaner future. A similar program has been passed in the US, with the infrastructure bill. Automobile manufacturers will try to meet stricter emission legislation in the US, Europe and China, by increasing the use of palladium, platinum and rhodium by at least 30% for three-way catalytic converters in most major vehicle markets, which would increase the demand to more than 10 million ounces, despite slowing global economic growth and falling car sales in key markets, like Europe, the US and China.

Besides being used to lower emissions in petrol cars, palladium is also used in hybrid cars. The transition into electric cars won’t be immediate, and meanwhile, the use of hybrid cars will increase. As a result, palladium prices will resume the bullish trend again, but until then, the sellers are in charge. The overall demand has been around 11.10 million ounces in 2021, which was 11.5% higher than in 2020. In the long run, the shift towards electric cars will be detrimental to palladium prices, but that will take a decade or two.

Auto Industry Faces Challenges

Palladium is heavily used in the auto industry, which means that the fluctuations in car production will have a substantial impact on the demand for the metal. Auto production has been on an increasing trend for a long time, peaking at 97,302,504 in 2017, but then, the production declined until 2021. In 2018, car production fell to 95,634,593, and in 2019 to 91,786,861, as a result of the trade war between the US and China, and in 2020, production fell further, to 77,621,582, as a result of the coronavirus restrictions and shutdowns. Auto production has picked up in 2021, but it remains hampered by the auto chip shortage, which has been going on since 2020.   

Auto Chip Shortage

The global semiconductor chip shortage, which started in 2020 as a result of the coronavirus closures, is an ongoing crisis, with the demand for integrated circuits currently higher than the supply. It has affected many industries and has led to shortages and queues for retailers of cars. The breakout of the coronavirus, which led to panic and uncertainty, disrupted many industries and supply chains. The production of semiconductor chips was hit hard, both by this, and by other factors. The restrictions imposed by the US Department of Commerce on China’s largest chip manufacturer, Semiconductor Manufacturing International Corporation (SMIC), made it more difficult for them to sell to companies with American ties, so the Americans turned to other manufacturers, such as the Taiwan Semiconductor Manufacturing Company Limited (TSMC) and Samsung. These companies were already producing at maximum capacity and they are now overstretched, especially as the global economy is bouncing back pretty strongly after the coronavirus crisis, particularly in terms of manufacturing and industrial production. But, in 2021, Taiwan experienced its worst drought in 50 years, which created problems for chip manufacturers, as they use large amounts of ultra-pure water to clean their factories. There were problems in Malaysia as well, but Malaysian fabrication plants are once again operating at 100% capacity. Analysts expect the situation to drag on well into 2022, while the US is expected to strengthen further, so Palladium is likely to remain bearish.

Palladium Supply Challenges in 2020 and 2021

On the supply side, 2020 and 2021 have been difficult for palladium, since there have been major disruptions. Work at South African mines and the depletion of palladium-rich surface materials, as well as in Canada, was halted during the pandemic breakout in 2020. A gaping supply deficit, due to short and mid-term market uncertainties, as a result of the rapid spread of COVID-19 from China to the USA and rest of the world, saw XPD crash lower, from $2,800 to $1,350, as it lost half of its value.

The high prices of palladium will continue to drive up secondary recovery from recycling, but this will not be sufficient to reduce the deficit in any meaningful way. In 2021, Nornickel, which is the world’s largest palladium producer, suffered a sudden flood at two of its mines. The flooding at the sites, which account for 36% of the ore mined by the company in Russia, prompted a reduction in Nornickel’s 2021 output earlier this year and reduced the supply of palladium. However, the Taimyrsky underground mine and the Oktyabrsky mine resumed full operations in June.

XPD/USD Correlation – Palladium Falls as USD Recovers

Palladium has been increasing its negative correlation with the USD, especially in 2021. The correlation between the USD and palladium was not as strong as it is with gold or some other risk assets, but the correlation increased in 2021, since it is quoted in USD. Palladium is both a safe haven and a commodity, so it benefits from both sides, since the price has been increasing for more than a decade, despite the recent retreat. While palladium has followed its path most of the time, during certain periods, the USD has been the driver of the XPD/USD. From 2014 until 2016 the USD index surged, as shown in the DXY chart below.

DXY turns bullish first, then bearish

XPD/USD turns bearish first, then bullish

During the same period, the XPD/USD retreated lower, which means that the increase in the USD had a negative impact on the price of palladium. From 2016 until 2018 the DXY turned bearish, falling from 103 points to 88 points, and the XPD/USD increased from $ 480 to $ 1,140. During the shock of the first half of March 2020, the DXY surged from 94 points to 103 points, while palladium crashed lower, only for things to reverse in the coming months. The USD remained weak until the middle of 2021, when the FED accepted that inflation is surging in the US, and decided to start tightening the monetary policy. The USD gained considerable strength in the second half of 2021, while palladium retreated lower. At the end of 2021 the decline in palladium stalled, while the USD stopped moving higher, which means that the negative correlation is strong, so we will have to follow the USD for hints on palladium.  

Palladium has retraced lower to the 20 SMA on the monthly chart

Palladium has been bullish during the last decade, but the trend has picked up incredible pace since 2018. In the 1990s, palladium was trading within a range, between $ 200 and $ 400, but it surged closer to $1,000 in the late ‘90s. XPD/USD was trading sideways, below $1,000, during the first half of the previous decade, only pushing above that psychological breakpoint in 2017. The sentiment eventually turned really bullish for palladium and safe havens, as a result of the trade war between the US and China. XPD/USD had surged above $ 1,600 by March 2019, but the biggest climb was yet to come, starting from September 2019, when palladium, which was trading at around $ 1,500, jumped to $ 2,880, with the biggest increase coming in January and February 2020, after the coronavirus outbreak in China. Eventually, we saw a reverse during March and April, as was the case for most assets. The 20 SMA (gray), which provided support in 2018, stopped the decline once again, and the bullish trend resumed again after the first shock. The global economy kept growing, and the amount of cash being thrown into the economy was immense. Some of it spilled into safe havens, and the level of uncertainty has also been high, which, of course, is great for safe havens. The price moved above $3,000 in April and May, but palladium has been declining since then, and now it is trading at the 50 monthly SMA (yellow).

MAs continue to provide support for XPD/USD

On the weekly chart, the bullish trend since 2017 can be seen clearly. That’s when the price climbed above moving averages and remained well supported by them until the big reversal began in May 2021. We see that the smaller period moving averages,such as the 20 SMA (gray) provided support when the pace of the uptrend was stronger, while the bigger Mas took over when the pullback was bigger, such as in March 2020, when we saw a quick crash from $2,800 to $1,350, when the coronavirus traveled out of China and spread worldwide. The 100 SMA (green) held as support, and the price bounced off that moving average, resuming the uptrend as the global economy recovered again. But, in 2021 the second crash came, as a result of the auto chip shortage, and XPD/USD broke below all moving averages, although the 200 SMA still stands. The price pierced it, but pulled back up above it, so we will see if this moving average holds in 2021. If it does, and the problem of the chip shortage starts to resolve itself, this might be a great opportunity to buy palladium.

On the weekly chart, palladium has been bearish since May last year, falling below all moving averages. The price has been bullish forever, but the chip shortage almost cuts palladium out, so the decline in the demand from the auto industry has led to lower prices, and now moving averages have turned into resistance on this timeframe. We are seeing some buying pressure as palladium gets closer to $1,500, showing that there’s some strong buying interest down there, and buyers are attempting to put up a fight. So, perhaps the reversal will start before the chip shortage problem is solved, as is usually the case with such trading scenarios.