The 1997 Failure Of The London Palladium Market - And The 2025 London Redux
Seeing the 1-month London lease rate for platinum surge last week to 24.5% due to metal shortage brings to the mind the epic market disruption of palladium back in 1997.
In 1997, Russia was mining approximately 50% of the world’s total annual mine production and that supply of palladium to global markets became disrupted for a 6 month period.
The impact of the shortage of physical palladium struck the leveraged London spot/cash market where promissory notes for cash market delivery of gold, silver, platinum and palladium are traded to set prices for these metals.
An article from 1997 by the late Ted Butler (may he rest in peace), a veteran writer who wrote about the metals market for decades, sums up the situation at that time:
“‘… Think of it, so soon into a market move (palladium for a few months, platinum for a few weeks), emergency discussions were held in London last week to work out the "problem". Interest rates of 300% were quoted on palladium one month leases (60% on platinum), before the lease market just shut down (I think forever). Market makers abandoned the forward market and cash deals were unilaterally extended to 30 days from the normal two day settlement. Dresdner Bank called upon the United States to release its stockpiles of platinum and palladium from the strategic reserve, even though the largest U.S. consumer, General Motors, said they had no unmanageable difficulties. Officials were quick and frequent in announcing there were no defaults (although the entire market had failed). …”
The situation then was remarkable:
300% p.a. London lease rates for a 1-month palladium lease
palladium lease market suspended
forward market positions ‘abandoned’ by market makers
delivery on cash/spot contracts unilaterally extended to 30 days from 2 days (although London bettered that in early 2025 with unilateral cash/spot gold contract extensions up to 60 days)
banks screaming for bail-outs to avoid losses (but that’s a banker feature)
In short, for a period the palladium paper market was wrecked.
The ‘situation’ was constrained primarily to palladium markets as the other three precious metals were relatively well supplied with physical metal especially the gold market that was flush with off-balance-sheet gold leases from central banks as coordinated by the Bank for International Settlements (BIS).
(note: the LTCM scandal triggered a similar panic in the gold market a few years later)
We can see the market response in the palladium price chart below with the red arrow showing the timing of Ted’s article.
Figure 1 - Palladium Price 1972 to 2000 - USD; source: macrotrends.com
After 6 months of disruption, palladium flows from Russia gradually resumed, including additional disposal of very large palladium stockpiles previously accumulated during the time of the Soviet union, however the damage was done as the paper shorts / price setters realized a guy can get hurt out there.
Implications For The Current Precious Metals Market
We’ve seen earlier this year unilateral delays of gold and silver in the London market along with surging lease rates. Now metals shortage and surging lease rates are translating into the platinum market.
After decades of loose monetary policy ‘stimulus’ by central banks and precious metals price fixing using promissory notes in London, this is the expected end stage where marginal demand for the security of physical metal safe havens distress leveraged market shorts leading to price resets.
Even as the retail market continues to be largely asleep.
Now, silver, platinum, and palladium markets do not have large stockpiles in official hands to bail-out those shorting metal and central banks are currently acknowledging their buying more than 1,000 tonnes (32 million oz.) of gold per year - with likely much more unofficial buying.
Signals of market distress will mount from a slow tick-tock to a steady drum roll as the market undoes decades of market intervention by central banks and bullion banks. Expect additional reports of bullion bank distress, soaring lease rates, delivery extension and default.
The War Wild Card
The current war being generated in the Middle East presents a potential wild card to the metals market.
If Iran can be provoked to block the 35 mile wide Strait of Hormuz through which 20% of the world’s daily oil production moves by tanker, it will have a highly destructive impact on the global economy. It is estimated that such an act would result in oil prices of $150 to $300 /bbl oil which would step-wise reduce economic activity and the industrial component of demand for silver, platinum, and palladium.
Global war or not, central banks will accelerate their printing to try to support their $300 trillion global debt bubble further increasing safe-haven savings demand for these four metals.
No war can save the bond market and the central banker asset bubbles will in the end collapse which will ultimately result in currency crises.
Safe haven assets with no counter-party risk - especially monetary metal - are looking more and more attractive.
Especially as a savings and transaction medium for those who do not want to hold currencies with their associated arbitrary new rules and buying power instability.
Best regards,
David Jensen
The war wild card appears not to be playing out so well. China has a vital interest in Iran. China looms over the situation in the Middle East, quietly supporting its ally. Perhaps they have calmed the Iranian leadership into not doing anything rash. If the war wild card bounces back at he who played it, and the longer this kinetic phase of the ongoing conflict lasts the more likely that is to happen, safe haven demand for precious metals will only increase. Who knows, perhaps even bewildered consumers in the West might begin to pick up signals from beyond the increasingly threadbare war propaganda. I hear this morning from the BBC that the Iranians fired a missile at a hospital in Israel. That would be highly ironic were it true, but whatever hit the hospital, I doubt it was a targeted projectile from a clearly circumspect Iran. We are at a peak psychological warfare. I am sure that can and will spike much higher, as will the price of gold. Will the leadership of the US-Israel combination be calmed? Are they able to be circumspect? I only discovered what money is a few years ago. Understanding the basics of money seems to have provided me with a sounding board. I am not so much of a derivative of my country's fiat currency - which is the ephemera called Sterling - as I once was. i.e. I am not continually falling. Maybe I am getting a bit wiser too, or perhaps I am just a bit less stupid, but whatever happens next, we already know that the immediate future will be 'historical'. Regardless of race, religion, nation or political persuasion, and regardless of our level of complicity, we all now must face the consequences of America entering the Thucydides Trap. (And yes, I think they are already in.)
Well, if Hormuz closes, PMs might drop, but silver should stay the course as you need silver in bombs 😋. My best guess: the markets will nose-dive, as everyone will want to cash out (and most liquid goes first). Then PMs will recover and take off.