White Gold!
Fundamentals
Precious metals traders have seen Gold prices, in U.S. Dollar (USD) terms at least, move relatively sideways since the all-time highs were reached back in December of last year, as a strengthening "Greenback" has taken a bit of the luster off the yellow metal. However, one member of the precious metals group, Palladium, has bucked the negative USD influence and has soared to contract highs. Investor interest in Palladium, as well as Platinum, has increased sharply this past year, after the introduction of physically-backed exchange traded funds for both Palladium and Platinum here in the U.S. back in January. Nearly 580,000 ounces of Palladium are being held by this ETF, taking supplies out of the market since its introduction. Palladium is a key component in catalytic converters for automobiles, which accounts for over 50% of demand for this metal. With definitive signs of a worldwide economic recovery and auto sales surging in Asia (especially China), many traders are expecting industrial demand for Palladium to increase as well. Given the relatively thin trading volume in Palladium, volatility can rise sharply -- especially if speculative interest continues to increase. Over 80% of global Palladium production is centered in only two countries -- Russia and South Africa -- and any supply disruptions out of these countries could cause a sharp up-move in prices. One only has to look at a Palladium futures chart from late 2000 and early 2001 when Palladium prices soared to over $1000 per ounce, as supply disruptions out of Russia caused shortages of the metal, which triggered a monumental short-squeeze as speculators and short hedgers, who were caught on the wrong side of the market, were forced to cover short positions at historically high prices, as few sellers were found. With Palladium prices currently 50% below the historic highs seen in 2001, some analysts believe the up-move in prices may still have some legs, especially with Gold futures trading at near historic highs and Platinum trading over $1,000 higher than its close cousin.
Trading Ideas
Although it might be mentally difficult for many traders to buy a new high in Palladium futures outright, its technical performance has been impressive -- especially when compared to the performance of Gold futures recently. Some traders who expect Palladium prices to continue to gain on Gold prices may wish to investigate buying June Palladium and selling June Gold. June Palladium is trading at a $608.00 discount to June Gold as of this writing, and traders choosing to buy the Palladium/Gold spread would want to see the discount continue to narrow.
Technicals
Looking at the daily chart for June Palladium for the past 6 months, we notice the over $200 per ounce rally as signs of an economic turnaround took hold. After a minor correction in late March, prices have steadily climbed, with Wednesday's surge on high volume a potential signal of fresh speculative interests entering the market. Even if the market is overdue for a correction, prices would still have to fall below the 100-day moving average, which is currently near the 433.00 area, to cause any major structural damage to the current bull move. The 14-day RSI has moved into overbought territory, with a current reading of 77.42. 600.00 now looks to be the next resistance level for June Palladium, with support seen at the 20-day moving average near the 493.00 area.
Mike Zarembski, Senior Commodity Analyst
