The paradoxical trend in the palladium market is palpable. In the last few days, physically-backed ETP holdings have seen a huge drawdown. At the same time, prices have hit multi-year highs. Market participants have been curious about the development. There is reason to believe that someone is buying up the metal on offer and building stocks.

On August 27, NYMEX palladium prices reached a high of $894 an ounce against $880 a month ago. Last year during the same time, prices were ruling at $749. The year-on-year appreciation is as much as 20 per cent. The price trend points to the market perception of strong demand not backed by adequate supplies. Interestingly, palladium has been an outstanding performer this year so far in terms of price strength.

Tuesday last, palladium ETP holdings saw a record withdrawal of 120,000 ounces, the largest daily fall since the launch of the first product in April 2007, according to experts. Holdings are now down to 2.9 million ounces, having seen a total outflow of 750,000 oz since the beginning of this year.

However, despite the drawdown in metal held in trust (which actually adds to the market supply), palladium prices have moved higher. London PM Fix on Friday (August 29) was $898 rising 1.7 per cent over the week. The previous Friday (August 22), it was $883, moving up by 0.6 per cent over the week.

To be sure, world palladium market is in a state of deficit. Primary supplies have remained stuck at around 6.4 million ounces last three years, having fallen from around 7.3 million ounces in 2010 and in 2011. It is normal that with the rise in prices, scrap supplies improve. Scrap sales were about 1.8 million ounces in 2010, but have steadily risen. For the current year, such sales are projected variously between 2 and 2.4 million ounces.

Palladium has varied applications including in auto-catalyst, industrial (electrical, chemical and dental) as also in jewellery. As a precious metal, it is also held for investment purposes. With improving economic growth prospects, demand is poised to expand. The fundamental trends in the market support the current high prices.

So, in the short-term at least, palladium prices are likely to remain firm so long there is a ready buyer for the metal. It is also possible that the quantum of spare inventory may not be rising. The big question is whether prices will decisively breach $900/oz and when.

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