What Ford's Palladium-Buying Mistake Says About Secret Suppliers

Includes: F, GLD, PALL, PPLT
by: MetalMiner

By Stuart Burns.

Although palladium demand is still strong, some parties are concerned the rise of ETFs pose a risk to price stability. Make sure to catch Part One of this article, highlighting the supply side outlook of the palladium market.

As we saw with gold and platinum, heavy and sustained selling by ETFs can depress prices for months, often moving at slower cycles than the day-to-day or week-to-week futures markets. ETF holders tend to be in for the longer term and some are concerned the market has been betting for too long that prices will rise. If the price continues to disappoint, widespread dissatisfaction could cause a fall.

But for the time being, steady industrial demand and the threat of supply disruption continue to have the upper hand and suggest there is more potential on the upside than the down, particularly if Russian stockpile sales slow even further or, better still, cease.

But let's not forget - we have been here before. Remember when Ford (NYSE:F) and GM (NYSE:GM) bought on the highs earlier last decade?

Going back to 2000, palladium hit an all-time high of more than $1,100 per troy ounce. As Forbes noted, there were a number of factors at play at the time. There was the tech boom and palladium is used in electronic equipment. But there was also Russia hinting that it was not going to sell any of its reserves.

"Ford and General Motors bought palladium in the open market to lock in prices, right at the highs, thinking that if Russia doesn't sell, there's going to be supply constraints that pushes prices higher," said Will Rhind, managing director of ETF Securities in New York at the time, as quoted by the Forbes article.

It didn't happen.

Russia did sell.

Prices fell over the next three years.

Ford wrote off nearly a billion in losses.

Palladium Price Uncertainty

It's unlikely we are about to see history repeat itself, but that's the conundrum of the palladium market - with a key supplier shrouded in total secrecy, not dependent on ore grades, logistics, weather or worker unrest, who knows what impact they will have in the months ahead.