Bankers and traders alike agree that palladium has been "tightening" over the past few months, with many saying that the metal hitting parity with platinum is now a case of "when not if". But the reasons behind the move are leaving some market participants bewildered this week, with talk of a possible "squeeze" taking place.
One senior banker said that lease rates for palladium -- that at which interest is paid on a loan of the metal -- had gone up to around 4% from 1%.
"There's certainly a tightness, but I'm not sure if it's fundamentals or a strong hand," he said.
Looking at sponge, or semi-finished palladium for refining, rates haven't changed from flat to plus $2/oz above dollar spot for some time.
Thus the potential squeeze is occurring in the refined market, with the front-end of the curve in focus, according to a source.
In a daily note to clients, Commerzbank said: "We cannot understand why the palladium price should be so strong given that automotive markets in the US and China are faltering and ETF outflows are continuing."
Palladium's main usage is as an auotcatalyst filter in gasoline-powered vehicles.
A trader said that he had heard the borrowing, or leasing, of refined metal was becoming expensive in both Zurich and London.
Still, JP Morgan was cautious on the metal's recent outperformance, suggesting a pullback towards $714/oz could be on the cards.
In a technical note the investment bank said, "the market has basically reached its counter-trend rally target at $812.64, where the air is expected to get thin again."
Still, JP didn't rule out another leg higher before any possible correction, towards $820-825/oz.
The metal was spot bid in London as of 1234 GMT Wednesday at $811/oz.
The London Bullion Market Association Palladium Price, administrated by the London Metal Exchange, settled on the morning of May 2, the start of the month, at $813/oz.
The LBMA settlement hit a low of $753/oz on the afternoon of May 22, and settled yesterday afternoon at $797/oz.
Commerzbank noted that: "The high speculative interest entails risks of a more significant price correction."
The senior banking source agreed.
"People have tried this [possible squeeze] before and it can get ugly, real fast. You'd be a brave man to take a position, short or long, at these levels," the source said.
Looking at the most recent US Commitment of Traders Report, Scotiabank said in a research paper that as of May 23 total commercial and non-commercial long positioning of palladium was down 3.4% on week at 29,000 contracts, however bets to the downside also eased 3.2% taking the next weekly change to minus 0.2%.
