Platinum and Palladium are part of the Platinum Group Metals (PGMs), a complex basket of highly correlated metals with both industrial uses and appeal as precious metals. In this article, we’ll go into all the nuances so you can trade these metals successfully.
Trading Platinum and Palladium through Contracts for Difference
Before diving into the specifics of platinum/palladium, a solid understanding of how CFDs work and how they differ from buying futures contracts is required. These are some of the key features of trading through a CFD:
- A CFD is a cash-settled derivative. This means you never physically buy, sell, or take delivery of any goods. You are speculating on a contract that is made to track the prices of platinum or palladium futures in major markets. Using a CFD thus allows you to speculate on prices without ever having to worry about rolling over a futures contract or undertaking physical delivery.
- CFDs allow you to use leverage, enabling you to use your capital more effectively. Using leverage wisely allows you to hold multiple positions at a time without tying up all your capital in just one asset. It also allows you to size up positions and potentially make significant profit from intraday swings that would otherwise achieve only a small percentage gain. Leverage is a tool; when used wisely, it can amplify potential returns, but if used without understanding, it can also increase the size of losses.
- Unlike a physical investment, holding a CFD position past the daily market close typically incurs an overnight financing charge (or 'swap fee'). This cost makes holding positions for extended periods less profitable. Therefore, the strategies discussed below are suited more for short to medium-term trades instead of longer-term investments.
The Platinum Use Case
Platinum is generally used in three main industries:
- Catalytic Converters: These are essential for converting harmful exhaust emissions from vehicles into less harmful substances.
- Chemical: Platinum acts as a catalyst in many industrial processes.
- Jewelry: Platinum’s strength, durability, and tarnish-resistant properties make it a popular choice for jewelry, especially for its silvery-white color.
Demand for platinum in catalytic converters is expected to falter, as the world economy starts durably shifting towards electric vehicles, which do not need catalytic converters. However, this expected demand loss is likely to be partially offset by a projected surge in its use within the burgeoning hydrogen economy, particularly in electrolyzers and fuel cells. The uncertainty surrounding how quickly the hydrogen sector can absorb the demand gap creates the potential for significant volatility during this transition period.
Beyond its industrial applications, Platinum is also valued as a safe-haven asset, similar to Gold or Silver. This makes Platinum a metal that trades in a unique position, somewhere between an industrial commodity and a precious metal. This dual nature is crucial because the underlying drivers for the two categories are distinct. Precious metals generally react to global factors like Real Yields and U.S. Dollar Strength, while industrial metals typically trade as a function of economic strength and are considered pro-cyclical. Therefore, successful trading of Platinum requires a balanced approach: traders must monitor the macroeconomic narrative for its safe-haven appeal while also analyzing the practical supply and demand dynamics of its industrial applications.
The Palladium Use Case
Palladium shares many of the same end-use applications as Platinum, with its demand also dominated by the automotive and chemical sectors. The key difference lies in the engine type: Palladium is generally favored for gasoline engines, while Platinum sees more use in diesel engines.
Like Platinum, Palladium's automotive demand is also expected to decline due to the rise of EVs. Crucially, however, Palladium is generally less useful for electrolyzers and fuel cells in the hydrogen sector, meaning it misses out on that potential future demand source. While it may see an increase in niche industrial segments within the chemical sector, it is unlikely to compensate for the significant demand currently stemming from gasoline autocatalysts.
Supply Dynamics
Platinum
Platinum is estimated to have started a period of sustained deficits, where demand will consistently outpace supply. This supply gap is only expected to increase in the coming years and is very likely to strongly drive up prices.
Sustained deficits inherently lead to a tighter physical inventory on exchanges, which then increases volatility. Once that market mechanism happens, the price only needs a relatively small catalyst to then significantly push up prices.
Once that happens, then inventories are likely to decline even further, which in conclusion creates a self-reinforcing loop that has the possibility of creating aggressive price action.
Platinum also suffers from a high concentration risk. An estimated 88.9% of the global total supply and reserves come from South Africa. Furthermore, Russia is the next-largest producer of PGMs. Any operational instability or geopolitical event affecting these regions can have an outsized impact on global supply.
Additionally, the already existing supply is often recycled, which helps to keep the supply stable. Platinum is mostly used in autocatalysts, and when these are eventually recovered, it allows for the used platinum to be extracted. However, this recycling process is highly price elastic, as this process is costly and recycling plants will only go through it if the economic incentive is large enough.
Palladium
Palladium supply is also highly concentrated, but rather than this concentration being in South Africa, it’s located in Russia. More notably, Norilsk Nickel (Nornickel) accounted for 41% of global output in 2019.
The EU has allowed for Nickel to still be imported from Russia, despite the overall sanctions. However, the sanctions have still decreased demand and created a geopolitical premium for non-Russian Palladium. The sanctions gap on Norilsk Nickel exports has been criticized, however, and it’s possible that Western countries will still end up sanctioning these exports as well. That would be a major catalyst for a rally, as markets are currently expecting this sanctions gap to persist.
In stark contrast to Platinum, Palladium has seen a major ramp-up in recycling over the past few years. Due to this increased recycling and the substitution of Platinum in some applications, the Palladium market is projected to shift into an oversupply environment, creating a structurally different price outlook from its sister metal.
The Platinum-Palladium Correlation
Platinum shows the highest correlation to Palladium. This is partially attributable to their substitutability in industrial use cases. In recent years, Palladium in autocatalysts has been gradually replaced by Platinum.
Platinum and Palladium are part of a group known as the ‘Platinum Group Metals’. This PGM group consists of the following metals:
- Palladium
- Platinum
- Rhodium
- Ruthenium
- Osmium
- Iridium
All of these six metals share very similar chemical and physical properties, which makes them accurate substitutes. This link decreases the likelihood of supply shocks as each of these metals can be substituted by a different metal within this group.
Specifically, Platinum and Palladium can be substituted on an almost 1:1 basis in many industrial use cases. However, this substitution requires technical adjustments, which means that substitution will only occur when Platinum prices are durably above Palladium prices (or the inverse).
This feature is called ‘The 7-Year Lock-In’. Platinum or Palladium is designed and implemented into a new vehicle platform, which is usually locked in for the vehicle platform’s life, which tends to be around seven years.
In recent times, Platinum has become a substitute for Palladium. Over the past years, Palladium has been consistently more expensive. This dynamic serves as a self-balancing price mechanism. However, both metals’ mispricing can be sustained for a long time, specifically due to the technological difficulties of substituting one metal for the other.
Monthly Timeframe Chart visualizing the Platinum-Palladium spread since 2018
The following chart shows this relationship very visually, and we can see that since 2018, Platinum has spent the majority of the time trading at a significant discount relative to Palladium, only converging in 2024.
To identify potential long-term setups, it's essential to closely monitor the Platinum-Palladium price spread to assess the economic viability of substitution for industrial producers. This spread dynamically decreases long-term price volatility, though the relatively small size of the market (compared to Gold & Silver) means general volatility remains high.
In addition to monitoring the Platinum-Palladium spread to take a direct, directional position in either of these two metals, it's also possible to execute a 'spread trade.' Spread trades are multi-leg positions where the trader simultaneously opens a position in two correlated assets.
For example, a trader in 2022 who was expecting a convergence of the Platinum-Palladium spread had two main options to approach this setup:
- Open a direct long position in Platinum
- Open a long position in Platinum while simultaneously opening a short position in Palladium
Both approaches have their own pros and cons. The direct long trade carries lower costs and is generally simpler to execute.
However, the spread trade has a unique advantage. In the direct trade, the trader can be correct in their view that spreads converge, while still losing money. If Platinum and Palladium both dropped sharply, the spreads can converge (Palladium drops more than Platinum) while the trader will still be in a losing position.
Traders use spread trading to hedge their market exposure, enabling potential profit if the price spread narrows, regardless of drops in USD prices. This reduction in directional risk is achieved, but it involves accepting higher trading costs.
News Reports
To successfully navigate the Platinum and Palladium markets, it's key to monitor news reports that can trigger significant price action.
The World Platinum Investment Council (WPIC) releases a quarterly report detailing deficit/surplus forecasts. These reports are often the main market catalyst, capable of causing aggressive spikes or drops in price.
XPTUSD on the 30-minute Timeframe
The following chart shows this news event very clearly, as the price aggressively spiked up upon a bullish WPIC report detailing larger-than-expected future supply imbalances.
For Palladium traders, the most important news events revolve around potential Russian sanctions on the metal. Furthermore, operational stability and production reports from Nornickel itself can also have profound market impacts.
Conclusion
The structural outlooks for Platinum and Palladium are starkly different despite their shared use cases. Platinum (XPTUSD) is defined by its growing scarcity and necessity, locked in a long-term supply deficit and underpinned by its potential role in the green economy.
Palladium (XPDUSD), on the other hand, faces a transition toward an oversupply environment due to a major ramp-up in recycling and demand loss from substitution to Platinum. These contrasting dynamics offer traders a unique set of opportunities for technical analysis and spread trading.
Stay ahead of market shifts by understanding the unique dynamics of Platinum and Palladium.