Palladium fell to a 1-1/2 month low as investors continued to move away from Exchange Traded Funds [ETFs] in Platinum Group Metals following further fundamental weakness resulting from the Volkswagen emissions scandal and excessive mine production.
"ETF holdings were reduced by a further 31,600 tr oz yesterday - likely due to profit-taking given that net long positions had risen to 13,500 contracts in the week to 27 October," said Commerzbank in a note.
"We see further downside potential for the palladium price in view of the currently negative investment demand and speculative positioning," it added.
Palladium spot prices were trading at a $325.60 discount to platinum prices at 1025 GMT Tuesday, with palladium and platinum trading at $642.80/oz and $968.40/oz respectively.
In the aftermath of the diesel emissions scandal, the platinum-palladium differential has recovered from a 13 year low on October 1.
Although palladium is a component of auto catalyst technology in the production of gasoline-fueled -- not diesel-fueled -- engines, excessive production and other fundamental weaknesses have pushed it lower.
UBS said between October 22 and 29, palladium ETF holdings dropped 3.47% (97,700 oz) compared to a 1.20% (33,500 oz) drop in platinum ETF holdings, indicating that funds were moving out of palladium at a faster rate than platinum.
Merrill Lynch said the problem that had plagued PGMs throughout 2015 was still present.
"The risk of deliveries from Russian stockpiles has not gone away, [and in South Africa] producers need to show more production discipline, putting more ounces into the market at lower cost is not a recipe for success," it said in a note.
Palladium and other PGMs have fallen heavily since the start of 2015 on a variety of factors, including increased mining output from key supplier South Africa, slower car sales in emerging economies and the Volkswagen diesel emissions scandal in September.
Three-quarters of palladium demand comes from catalytic technologies.
"Shrinking [emerging market] car sales and production [is] something that has hit palladium hard, given its huge reliance on auto-catalyst demand," said Macquarie in a note.
