LONDON Palladium leapt more than 7 percent on Friday to its highest in over 16 years, as a surge in speculative demand forced industrial users to close out short positions, traders said, pushing the metal through long-term chart resistance.
The backwardation in the market - a formation in the forward curve in which the price of metal for future delivery is below the spot price, can suggest a near-term shortage of metal and has recently steepened, prompting a wave of buying.
That pushed prices through the 16-year declining trendline at $868 an ounce, triggering a further surge that took them to their highest since early 2001 at $914.70 an ounce. Spot palladium was at $884.60 an ounce at 1345 GMT, up 3.7 percent.
"The background for palladium is for good industrial demand and likely a significant market deficit this year, and on top of course you've got this speculative squeeze," Mitsubishi analyst Jonathan Butler said.
"The backwardation has got a lot steeper in the last day. Metal for immediate delivery is very tight, and that is being reflected in those forward rates moving into an even steeper backwardation."
Traders reported a reluctance to lend the metal, suggesting tightness in near-term supply. Chart patterns indicate that the metal is vulnerable to a sell-off from these elevated levels, however, technical analysts said.
Gold fell for a third day, meanwhile, after British elections failed to deliver a clear majority for Prime Minister Theresa May, knocking the pound sharply lower and helping lift the dollar index to its highest since late May.
Spot gold was down 1 percent at $1,265.91 an ounce, while U.S. gold futures for August delivery were $10.90 an ounce lower at $1,268.60.
Sterling-denominated gold rose to a near two-month high of 1,007.98 pounds an ounce as the British currency fell as much as 2.5 percent. Along with a drop in the euro, that helped lift the dollar half a percent versus a currency basket.
Meanwhile the FTSE share index, composed largely of companies that earn foreign currencies and benefit from a weaker pound, rose 0.5 percent, undermining potential demand for gold as a haven from risk.
"A lot of the financial markets haven't moved as much as you might have thought," Oxford Economics analyst Daniel Smith said.
"The dollar's a little bit stronger, and that's going to weigh on gold," he said. "It's not just about risk appetite, it's about what people are thinking on the dollar."
Among other precious metals, silver was down 0.8 percent to $17.23 an ounce, while platinum was 0.6 percent higher at $938.80.
(Reporting by Jan Harvey; Additional reporting by Vijaykumar Vedala and Koustav Samanta in Bengaluru; Editing by Mark Potter and Elaine Hardcastle)