Palladium set for glum October as demand picture weighsen

Palladium is heading for its biggest one-month drop since May in October as a weak demand picture for the autocatalyst metal reins in gains made on the back of U.S. monetary stimulus and a sharply higher platinum price.

Prices swung to their lowest since mid-August last week from the six-month high above $700 an ounce they hit in September, helped by euphoria linked to the Federal Reserve's $40-million-a-month liquidity boost for the U.S. economy.

As that dissipated, investors were faced with a glum underlying picture for the metal which, despite the promise of longer term support, could lead prices lower still.

Palladium, even more than platinum, is dependent on what's happening in the auto industry, Bank of America-Merrill Lynch analyst Michael Widmer said. And you have to say, Europe is not looking good, China car sales and production have for a good part of the year been relatively soft.

The market is overall still tight, but that doesn't really matter if you have a lack of demand, he added.

A spate of carmakers in Europe, including Ford, Volvo, Daimler and Renault have released downbeat statements on production this month.

Even China, long seen as a rare bright spot for the motor industry, has shown signs of slowing. Chinese vehicle sales fell for the first time since January in September, and grew just 3.4 percent in the first nine months of the year.

A lot of the excitement about palladium in 2010 was based on growth in car sales in China and other fast-growing markets, Mitsubishi analyst Matthew Turner said. Palladium outperformed gold and platinum that year to more than double in price.

These forecasts were assuming 10 percent growth every year for decades, and at the moment there's some scepticism about that. That has hurt the very bullish outlook.

That has led some investors to pull out of palladium investments like exchange-traded funds. Since the end of February last year, palladium ETFs have seen outflows of more than half a million ounces, while platinum ETFs have recorded inflows of nearly 210,000 ounces.

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