Why Palladium Is on a Tear
Physical palladium and rhodium markets are buzzing. Reported prices for both metals leapt higher in recent days.
The story behind palladium’s move is that a physical shortage has developed in London. Traders sold metal they didn’t physically possess. Now they are being asked to deliver the bars and they are scrambling to secure the metal needed, bidding prices higher.
It looks like bullion bankers selling paper metal are finally getting called for selling way more than they can actually deliver!
People have complained about this practice in precious metals markets for decades.
More and more contracts have been sold, but inventories of actual physical metal have not kept pace. Price discovery is broken when the paper price of metal is detached from physical supply-and-demand fundamentals.
Today, there are hundreds of paper ounces floating around for every ounce of physical metal eligible for actual delivery.
As soon as a few contract holders lose confidence in their ability to redeem the paper for actual metal, the jig is up. The rush for physical bars will drain exchange vaults quickly and anyone still holding paper when the music stops will be out of luck.
That may be happening now in the market for palladium.
Sellers with an obligation to deliver physical metal can lease bars, rather than purchase them. But that is now a very expensive proposition. Lease rates spiked to near 30% last week in London. Lessees must promise to return the quantity leased plus 30% in additional palladium ounces.