The chart below shows changes in the gold-to-palladium ratio in the long run (for the years 1977-2002 we use gold and palladium futures prices, while for years 2003-2016 we use London fix prices both for gold and palladium, due to the incomplete dataset of Nymex palladium futures prices).
Chart 1: Gold-to-palladium ratio (price of gold divided by the price of palladium, red line, right axis), price of gold (yellow line, left axis, Comex gold futures and London A.M. Fix) and price of palladium (blue line, left axis, Nymex palladium futures and London fix) from 1977 to May 12, 2016.
As one can see, the general pattern is quite similar to the case of the gold-to-platinum ratio. It should not be surprising, because palladium is also used in the automotive industry and can be regarded as a cheaper substitute for platinum. The ratio was rising during bull markets in gold in the 1970s and 2000s (it implies that gold was overvalued relative to palladium), and was declining during the bear markets in gold in the 1980s and the 1990s, peaking in 1982 and 2008, while bottoming out in 2001. It was a 96.6-percent decline from the peak, signaling significant overvaluation of palladium, which skyrocketed at the end of the 20th century due to disruptions of the supply and intense demand from the automobile industry. The price of palladium reached an all-time height of almost $1,100, a level more than four times higher than the price of gold. Thereafter, the ratio started to rise again, but it surged in December 2008, reaching almost 4.9 after the outburst of the financial crisis. The jump in the gold-to-palladium ratio clearly shows that gold is mainly a safe-haven asset, while palladium is an industrial metal.
The gold-to-palladium ratio is much more volatile than the gold-to-platinum ratio, as palladium is the most industrially significant among main precious metals (industry generates more than 70 percent of the demand for palladium). The ratio ranged from 0.24 to 7, with a general average of 2.6 and the average range between 1.9 and 3.2. Therefore, if the ratio moves to extremes (let’s say, above 4 or below 1.5), it creates a trading opportunity for investors. When the ratio is high, it indicates that palladium may be oversold and present a buying opportunity. And when the ratio is low, it means that palladium may be overbought and reflect a selling opportunity.
We encourage you to learn more about the shiny metal – not only about its relationship with palladium, but also how to successfully use gold as an investment and how to profitably trade it. A great way to start is to sign up for our gold newsletter today. It’s free and if you don’t like it, you can easily unsubscribe.