While the divergences [2] and WTF charts [3] of the past few weeks may have intrigued many by their unprecedented nature, we thought the correlation between the following three assets was too good to pass off as merely spurious. The last six months have seen the ratio of palladium-to-gold track incredibly closely with the S&P 500. Fundamentally, this may make some sense. As Citi notes, given gold’s strictly limited supply and zero coupon, it had been a major beneficiary in a ZIRP world where easy money seemingly had no end, whereas given its industrial uses, palladium behaves more like a risk asset than a precious metal. Its biggest source of demand stems from gasoline based catalytic converters, hence it is tied to the strength of the US economy/ risk appetite. We bring it up as we suspect this week's equity market behavior may have many concerned that 'bubbles' do exist [4] - no matter what they are told - and perhaps, as a way to hedge the exuberance, buying gold and selling palladium is a less pernicious method than unwinding the entire market all at once.
[5]
Charts: Bloomberg