Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21
CISCO 2020 Dot com Bubble Stock vs 2021 Bubble Tech Stocks Warning Analysis - 6th Oct 21
Precious Metals Complex Searching for a Bottom - 6th Oct 21
FB, AMZN, NFLX, GOOG, AAPL and FANG+ '5 Waves' Speaks Volumes - 6th Oct 21
Budgies Flying Ability 10 Weeks After wings Clipped, Flight Feathers Cut Grow Back - 6th Oct 21
Why Silver Price Could Crash by 20%! - 5th Oct 21
Will China's Crackdown Send Bitcoin's Price Tumbling? - 5th Oct 21
Natural Gas News: Europe Lacks Supply, So It Turns to Asia - 5th Oct 21
Stock Market Correction: One More Spark to Light the Fire? - 5th Oct 21
Fractal Design Meshify S2, Best PC Case Review, Build Quality, Airflow etc. - 5th Oct 21
Chasing Value with Five More Biotech Stocks for the Long-run - 4th Oct 21
Gold’s Century - While stocks dominated headlines, gold quietly performed - 4th Oct 21
NASDAQ Stock Market Head-n-Shoulders Warns Of Market Weakness – Critical Topping Pattern - 4th Oct 21
US Dollar on plan, attended by the Gold/Silver ratio - 4th Oct 21
Aptorum Group - APM - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 3rd Oct 21
US Close to Hitting the Debt Ceiling: Gold Doesn’t Care - 3rd Oct 21
Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
Original Oculus VR HeadSet Rift Dev Kit v1 Before Facebook Bought Oculus - 3rd Oct 21
Microsoft Stock Valuation 2021 vs 2000 Bubble - Buy Sell or Hold Invest Analysis - 1st Oct 21
How to profit off the Acquisition spree in Fintech Stocks - 1st Oct 21
�� Halloween 2021 TESCO Shopping Before the Next Big Panic Buying! �� - 1st Oct 2
The Guide to Building a Design Portfolio Online - 1st Oct 21
BioDelivery Sciences International - BDSI - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 30th Sep 21
America’s Revolving-Door Politics Behind the Fall of US-Sino Ties - 30th Sep 21
Dovish to Hawkish Fed: Sounds Bearish for Gold - 30th Sep 21
Stock Market Gauntlet to the Fed - 30th Sep 21
Should you include ESG investments in your portfolio? - 30th Sep 21
Takeda - TAK - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 29th Sep 21
Stock Market Wishing Away Inflation - 29th Sep 21
Why Workers Are NOT Returning to Work as Lockdown's End - Wage Slaves Rebellion - 29th Sep 21
UK Fuel PANIC! Fighting at the Petrol Pumps! As Lemmings Create a New Crisis - 29th Sep 21
Gold Could See Tapering as Soon as November! - 29th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Riding the Palladium Roller Coaster

Commodities / Palladium Jun 10, 2010 - 01:15 AM GMT

By: Jennifer_Barry

Commodities

Best Financial Markets Analysis ArticleAs I discussed in my February article, “Palladium Still Shines,” palladium is a versatile element used in  everything from electronics to polyester production to cancer therapy. In most applications, such as autocatalysts, cheaper metals can't be substituted. In fact, if hydrogen-based fuel cells become significant in local power and automotive applications, those high-tech uses would also require palladium.


I argued that palladium was still undervalued despite the 117% gain in 2009, and was too cheap compared to its sister metal, platinum. I wasn't surprised that palladium rose more than US$120 after publication, taking out my short-term target of $512.

Considering the metal's tumultuous history, I was also not shocked to see a correction a couple months later, although the speed was breathtaking. Palladium had a huge run-up from the lows at $160, and was close to challenging the spike high of 2008, so it was due for a break.

While it's been a fun 16 months, with the current price at $447 per ounce, is it time to get off this ride? After all, many analysts are expecting vehicle sales to drop in the third quarter of 2010. If the global economy turns down again, commodity demand could fall, and investors could liquidate the palladium ETFs, swamping the market with supply.

Powerful Demand

As nearly half the demand for palladium comes from autocatalyst production, a study of the car market is crucial to forecasting palladium use. While bearish pundits cite the eurozone crisis as a reason for sales to retrench, the situation is not so simple. Although analysts predict Western Europe’s vehicle sales to drop anywhere from 7.4% to 12% in 2010, Russian purchases jumped 20% in April due to the government’s own version of “Cash for Clunkers.”

Struggling areas like Western Europe and Japan will be counterbalanced by many bright spots. The US may be in a slump, but Americans are expected to buy 13% more cars than last year. Sales are up strongly in India and South America as well.

The largest vehicle market, China, should see a double digit increase in purchases in 2010. This nation mostly purchases small, gasoline powered cars which require palladium in their catalysts, not platinum. China's GDP is rising and there is a large amount of pent-up demand, as the Chinese only have 20.5 cars for every 1,000 people. In addition, the government is offering incentives to buy cars which continue through December. China should push global demand into positive territory, with total vehicle sales expected to rise 4% this year.

Two secondary sources of palladium demand, jewelry and electronic devices, dropped 17% and 7% respectively last year. Although consumption dropped, these industries are increasingly substituting palladium for more expensive metals like rhodium or platinum. Any economic recovery will benefit palladium more than other platinum group metals. With the BRIC countries expected to have higher GDP growth in 2010, demand for these discretionary items should increase.

Much of the drop in industrial use last year was offset by the 49% jump in investment demand. Investor interest for the metal is growing rapidly, consuming approximately 10% of supply in 2009. According to the Financial Times, palladium ETFs held 1.8 million ounces of the metal as of June 2 – 25% of annual production. While I am skeptical about the actual bullion holdings of PALL and securities like it, the desire to own palladium is putting a tremendous amount of pressure on this market. Even with the correction, few investors sold out of ETFs, demonstrating they are holding out for much higher prices.

Shrinking Supply

Unlike currencies, metals can't be printed so it's difficult to increase supply. Production of palladium is only 10% that of silver, and it’s usually a byproduct of nickel mining. It's rarely feasible to chase higher prices with more palladium production.

In addition, palladium deposits are only found in a few countries. Russia now dominates the market, supplying 50% of global demand. Unreliable producer South Africa has fallen to second place with 35% of global output. North America contributes a little more than 10% of the total.

Although palladium production from Canada and the US should increase in 2010 due to reopened mines, it won’t affect supply significantly. In reality, any production boost in North America is likely to be swallowed by cuts this summer in South Africa. Despite government spin, the nation has not solved its energy generation problems. The public utility Eskom has another huge challenge this summer when the World Cup arrives in Johannesburg on June 11. This month long event will take priority for power, so Eskom is expected to cut electricity to the country’s mines. The last time mines were closed by “load shedding” directives, the palladium price spiked.

Primary mine supply of palladium doesn't satisfy global demand, so some of the deficit has been filled by reuse. As I mentioned in February, most of the “Cash for Clunkers” subsidies have ended, shutting off a large supply of recycled vehicles. In fact, refiner Johnson Matthey reported that recycling from all sources dropped more than 11% last year.

Metal stockpiles were a major source of palladium supply during the last decade, but the Russian government is the only one left. As recently as 2008, Johnson Matthey estimated that over 13% of global palladium was supplied by this national stockpile. The company’s analysts assumed that Russia would sell approximately 960,000 ounces in 2009, the same amount as the previous year, causing a surplus of 655,000 ounces. However, credible sources such as Mining Weekly and Norilsk Nickel assert that the Russian stocks are nearly depleted, and it’s unlikely that any sales occurred in 2009. If JM’s other data is correct, the market has already slipped into deficit.

Brilliant Future?

Technically, palladium is correcting its long term move from $160 to $567.45. The price slashed through the .382 Fibonacci level at $411 and even penetrated the 200 day moving average at $400 intraday before bouncing off long-term support at $390. The recovery has been erratic, reaching $474 two weeks ago before settling back to $447 today. Palladium seems to be consolidating with the 200 DMA acting as support at $408.

Although I think it’s unlikely, a significant drop below this support level could see the metal testing the .50 retracement level at $364.

Although palladium had a dramatic 16 month run, skyrocketing 254% before correcting, I believe it is still undervalued. Demand for the metal is growing as manufacturers substitute palladium for more expensive metals. Asian countries, especially China, are buying more electronics and jewelry that increasingly use this metal. Globally, new buyers are choosing the smallest cars which tend to be gasoline powered, benefiting palladium demand at the expense of platinum.

Although many analysts believe palladium is expensive at this price, a shortage trumps any other fundamental factors. Knowledgeable observers believe the Russian stockpile is nearly gone, and it’s unlikely there will be any further substantial destocking. South Africa will almost certainly have to cut electricity to the mines during the World Cup, ceasing production from the second biggest source of metal. Increased production from Canada, the US and Zimbabwe will not be able to compensate.

I don’t believe the market fully understands the implications of these facts. Once traders realize that palladium is now in a supply deficit, I predict we will see another price explosion this summer that will take out the 2008 high of $600. A strong rebound in the euro or more serious mining issues could see palladium top $700 per ounce later this year.

by Jennifer Barry

Global Asset Strategist

http://www.globalassetstrategist.com

Copyright 2010 Jennifer Barry

Hello, I'm Jennifer Barry and I want to help you not only preserve your wealth, but add to your nest egg. How can I do this? I investigate the financial universe for undervalued assets you can invest in. Then I write about them in my monthly newsletter, Global Asset Strategist.

Disclaimer: Precious metals, commodity stocks, futures, and associated investments can be very volatile. Prices may rise and fall quickly and unpredictably. It may take months or years to see a significant profit. The owners and employees of Global Asset Strategist own some or all of the investments profiled in the newsletter, and will benefit from a price increase. We will disclose our ownership position when we recommend an asset and if we sell any investments previously recommended. We don't receive any compensation from companies for profiling any stock. Information published on this website and/or in the newsletter comes from sources thought to be reliable. This information may not be complete or correct. Global Asset Strategist does not employ licensed financial advisors, and does not give investment advice. Suggestions to buy or sell any asset listed are based on the opinions of Jennifer Barry only. Please conduct your own research before making any purchases, and don't spend more than you can afford. We recommend that you consult a trusted financial advisor who understands your individual situation before committing any capital.

Jennifer Barry Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in