Palladium Rises Following US Proposal for Sanctions on Russian Exports, Goldman Anticipates Gamma Squeeze

Palladium's Potential Rise

Three weeks ago, the world was captivated by China's latest attempt to stimulate its economy. One commodity that was predicted to benefit the most if China's momentum increased was palladium. Unlike gold and silver, palladium had remained relatively stable in recent years, trading around $1000 after reaching a peak of $3500 in early 2022. At that time, palladium was referred to as the "meme stonk" of the commodity market. China's previous stimulus efforts had resulted in palladium reaching $3000. However, China was not the only potential catalyst for a rise in palladium. Around the same time, Russia’s Federal Budget revealed plans to significantly increase its holdings in precious metals over the coming years, including gold, platinum, silver, and palladium.

Palladium's Recent Surge

Fast forward to the present, and palladium has surged as much as 16% higher since our initial observation, outperforming both gold and silver over that period. The catalyst for this sharp rise was not a resurgence of Chinese stimulus or even Russian purchasing, but a Bloomberg report that the US had requested G7 members to consider sanctioning Russian Palladium. The reason for this significant spike is that Russia produces 38% of the world's palladium (or 25% of total supply when recycling is factored in), while China is the largest consumer. Removing the largest supplier while stimulating the largest buyer has resulted in a price surge.

Future Price Gains and Potential for 2022 Repeat

What does this mean for further price gains, and is a repeat of the 2022 meltup - when palladium doubled in price in just a few months - possible? For answers, we turn to Goldman commodity trader Gerald Tan, who stated that "short covering began during the second half of the summer but Palladium remains quite short and sensitive to headlines per the extreme moves we saw at the beginning of this year." One reason why short sellers haven't yet panicked and caused the price to surge even higher is that palladium is relatively easy to transport and store. Russia produces 2.7 million ounces or 85 metric tons of palladium, which only represents 7 cubic meters, making it one of the easiest and cheapest commodities to ship and store. Additionally, while the LPPM removed Russian-produced metal from its good delivery list in April 2022, the market reaction was similar at the time but no evidence of tightness was observed in the months following this announcement. This could change if the G7 decides to implement sanctions on Russian palladium.

Goldman's Observations and Predictions

While waiting for a decision, the Goldman trader noted that while his desk had seen renewed interest from the bank's investor franchise, consumers have not yet reacted: "Vols are up 10v in the front and forwards are 50 bps tighter across Cal25." The key takeaway: Goldman is keeping an eye on the 1-year highs at $1225 where dealers are short some gamma and Rhodium as a proxy for non-spec reaction and genuine tightness. If palladium rises another 8% from here, we may witness the next massive gamma squeeze.

Bottom Line

The recent surge in palladium prices and the potential for further increases highlight the intricate interplay of global economic policies and commodity markets. The proposed sanctions on Russian palladium exports by the US and the possible response from the G7 could significantly impact the palladium market. What are your thoughts on this development? Feel free to share this article with your friends. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.