Many investors know about the different components that make up precious metal stocks – silver, platinum, gold and palladium.
You don’t usually hear a lot about palladium, however it’s really important that you understand palladium since there are a lot of important correlations between the palladium-gold ratio and the prices in the stock market.
The palladium-gold ratio is currently putting out some warning bells about the stock market and the economy as a whole.
Palladium vs Gold and the Economy
Even though palladium isn’t as beloved as gold, it’s a good indicator of the state of the economy due to its variety of uses in comparison to other precious metals. In fact, 90% of palladium’s allocation is from industrial sources.
Gold on the other hand, is used much less in industrial proccesses. A lot of the industrial use for palladium relates to gas-powered vehicles and electronics, due to its excellent durability and conductivity.
After the stock market bottomed out in 2008, palladium’s importance became evident when it outperformed the other various precious metals. It's price was driven up thanks to increased demand in markets like China. Emission controls also started becoming more common, which meant palladium was being more widely used in electronic applications.
The reason that the palladium-gold ratio is so important is because it’s more sensitive when it comes to global economic activity. Even though the ratio is often swayed by the palladium supply issues, this is still true.
Consider for a moment palladium's past performance in relation to the automotive industry since vehicle sales fell worldwide in 2015 to just a small gain of 1.9%. That low of a number is what contributes to the palladium-gold ratio dropping.
The sale of vehicles isn’t the only reason why this matters. The relationship between palladium and gold also impacts the stock market.
How the Ratio Affects the Stock Market
The performance of palladium versus gold directly impacts the stock market and worldwide GDP levels. The direction of both follows a strong trend. From March 2015 to the end of last month, price figures fell from .70 to about .44 around May 25th. This is a very shocking 37% decline in just over a year.
The problem is that the S&P 500 has seen an increase in volatility, though not a consistent decline. Although the S&P is where it was back in March of 2015, it might be headed for a steep decline.
This connection between the stock market and the palladium-gold ratio could mean a couple of things. It’s possible that the levels of the S&P 500 are overvalued substantially, and there is going to be a potentially deep and significant correction. Or, palladium also might really be priced in comparison to gold.
The economy and stock market are going to have a long road ahead, with the potential that the government may begin to increase lending rates in the near future. The markets are starting to show what the ratio is describing.
Going forward, palladium-gold falling prices are going to be one of the earliest warning signs. No matter what, precious metals such as gold will most likely benefit, whether palladium-gold prices increase or an economic decline materializes. This is one of multiple reasons why many investors keep a large portion of their stock holdings in the precious metals market.