(Kitco News) – Renewed strength in the U.S. dollar, trading near a three-week high, is weighing on the entire precious metals market but that won’t be enough to stop the long-term uptrend in palladium, one bank says.
The precious metal has fallen from its record highs above $1,500 an ounce, but analysts at Bank of American Merrill Lynch (BoAML) said that it still has plenty of opportunities to move higher. The bank is lifting its price forecast this year, saying it sees the metal averaging $1,800 an ounce, a 22% increase from its previous estimate.
The analysts added that they see prices rising as high as $2,000 an ounce. June palladium futures last traded at $1,473.40 an ounce, down 0.87% on the day.
“In our view, palladium is firmly supported by fundamentals on the physical market,” the analysts said.
The bank said that prices will rise as inelastic demand is coming to a head with inelastic supply.
“For years, this has not been an issue, but persistent inventory declines have increasingly raised apprehension over the availability of the precious metal,” the analysts said. “Inelastic supply and demand, combined with market deficits, meant that there was no price at which the market would have cleared.”
While supply continues to tighten, the analysts at BoAML said that they don’t see demand shifting anytime soon as automakers continue to focus on reducing emissions. Palladium is a critical component in catalytic converters in cars with gasoline engines.
The analysts said although higher prices could force some automakers to substitute palladium with cheaper platinum, they don’t see it happening en masse. Quoting industry research, the analysts said that palladium is slightly more effective compared to platinum.
“We understand that car producers will at least for another 12 month retain the immediate focus on emissions, rather than reducing palladium costs,” the analysts said. “This implies that demand will likely remain supported, even when factoring in the recent underperformance of global auto sales.”