A lot of attention was shifted in 2022 so far to the commodities space, given the rapidly-rising and volatile valuations. That is why, if you are a commodities trader, you should be aware of correlations between different commodities – and their effect on other markets.
Even if right now the focus is on energy – in particular crude oil and natural gas – other assets such as platinum and palladium should definitely not be ignored. Traders use derivatives based on these instruments as an investment venue, for hedging, or just to speculate on their prices. But there are several things you should know about them, before diving in.
Commodities vs. other asset classes
One of the first aspects to note is that there is a negative correlation between commodities and risk assets like stocks, mainly when commodity prices are rising impulsively. That is the case because higher input costs ultimately end up impacting the profitability of publicly-listed entities.
Take palladium, for example, which is a shiny, silvery metal that is commonly used today in various sectors of the economy, particularly for electronics and industrial products. At the same time, it can also be used in medicine, chemical applications, jewelry, and dentistry.
Although not as popular as gold, platinum is a precious metal worth keeping an eye on. It can rise in value when currencies, such as the US Dollar, are falling. If you are already a trader and working with brands like easymarkets.com, then you know that currencies are gradually losing purchasing power.
Traders and investors should allocate capital and protect themselves against this monetary phenomenon, and some of them choose to seek refuge in precious metals like platinum.
Platinum to Palladium ratio
Another interesting indicator useful for commodities traders is the platinum-to-palladium ratio. It measures the relative strength of platinum price, compared to palladium, and can be used as a tool signaling when platinum is overvalued relative to palladium.
Investors are able to use it in order to determine whether it is the right time to shift from platinum to palladium or vice-versa, based on how valuations are evolving. Since 1990, this ratio averages at 2.8, trading above parity most of the time, given palladium is a cheaper alternative to platinum.
Monitored on a daily basis, this ratio does little to improve your trading capability. However, when the ratio reaches an extreme, that’s when new opportunities can be spotted from an early stage.
Inflation and economic activity
At a macro level, commodity prices are reflecting inflationary pressures and the strength of economic activity. When platinum and palladium are rising, that’s a sign demand is higher than supply. During a period of economic slowdown, commodity prices are weakening due to demand destruction.
Both platinum and palladium have been dropping since March, on the back of a stronger US Dollar, fears of a global recession, and peaking demand, as spending is cut back both by consumers and by manufacturers of goods. Conditions can change over the next couple of months, depending on how the relationship between demand and supply evolves.
