Agoracom Blog

#Palladium – The Prospects For A Repeat Performance SPONSOR: New Age Metals $ $ $ $ $ $GLEN

Posted by AGORACOM-JC at 4:03 PM on Monday, January 6th, 2020

SPONSOR: New Age Metals Inc. The company owns one of North America’s largest primary platinum group metals deposit in Sudbury, Canada. Updated NI 43-101 Mineral Resource Estimate 2,867,000 PdEq Measured and Indicated Ounces, with an additional 1,059,000 PdEq Ounces Inferred. Learn More.

Palladium – The Prospects For A Repeat Performance

  • A fantastic year in 2019.
  • A rally for the ages since 2016.
  • A new decade poses threats to the rally.

Of the four precious metals that trade on the NYMEX and COMEX divisions of the Chicago Mercantile Exchange, palladium is the least liquid. As of December 27, the total number of open long and short positions in the gold futures market stood at 765,653 contracts, a record high representing 76.65 million ounces of the yellow metal. Silver’s open interest was at 225,753 contracts that contain a total of over 1.128 billion ounces of silver. A gold future represents 100 ounces of the metal, while a silver contract has 5,000 ounces.

In platinum, 98,042 contracts hold over 4.9 million ounces of platinum metal, as each contract is for 50 ounces. A palladium contract is for 100 ounces of the platinum group metal. As of December 27, 23,735 contracts represented 2,373,500 ounces. Markets with less liquidity when it comes to volume and open interest tend to be more volatile than those with higher degrees of liquidity. Palladium has lived up to that tendency since early 2016 as the price has been explosive on the upside. The Aberdeen Standard Physical Palladium Shares ETF product (PALL) replicates the price action in the palladium market. At the same time, the Aberdeen Standard Physical Precious Metals Basket Shares ETF (GLTR) holds palladium as well as gold, silver, and platinum bullion.

A fantastic year in 2019

Palladium was, by far, the best-performing precious metal that trades on the NYMEX or COMEX exchanges in 2019. Palladium’s price action was impressive considering that as of December 27, gold, silver, and even platinum have posted double-digit percentage gains compared to their closing prices as of December 31, 2018.

Source: CQG

As the weekly chart highlights, palladium moved from $1197.50 on the final day of 2018 to $1875.40 as of December 30, a gain of 56.6%. Palladium climbed to its most recent continuous contract high of $1963 per ounce in December while the March futures contract peaked at $1974.60.

Both price momentum and relative strength indicators were in overbought territory on December 30, but the metrics came down from recent highs given the correction on Friday, December 20. On the weekly charts, palladium put in a bearish reversal during the week of December 16. On a year-on-year basis, the total number of open long and short positions in the NYMEX palladium futures market edged lower in 2019, falling from 26,773 to 23,735 contracts from the end of 2018. Meanwhile, weekly historical volatility at 23.12% was just below the midpoint of the year for the metric.

2019 was such a good year for palladium that it was the best-performing commodity that trades on US exchanges of all during the period.

A rally for the ages since 2016

The bull market in palladium kept going in 2019, but it dates back four years to the beginning of 2016.

Source: CQG

The monthly chart illustrates what has been a parabolic trend in the precious metal since it found a bottom at $451.50 in January 2016. At $1875.40, the price was over four times higher since the 2016 bottom. Over four years, every price correction has been a buying opportunity in the precious and industrial metal. The most recent decline from $1963 to $1808.80 during the week of December 16 was looking like another opportunity to purchase palladium as the price recovered quickly to around the midpoint as of December 30.

A new decade poses threats to the rally

Palladium has been nothing short of a bullish beast since early 2016. The metal that cleanses toxins from the air in gasoline-powered automobile catalytic converters has experienced significant demand growth. With tighter pollution regulations around the world, and specifically in China, the requirements for the metal continue to rise.

The vast majority of palladium output each year comes from South Africa and Russia. According to Johnson Matthey, 2019 was the eighth consecutive year of a deficit between supply and demand in the palladium market, which continues to fuel price gains.

Source: Johnson Matthey

The chart shows that in May 2019, Johnson Matthey projected an 809,000-ounce deficit. The supply shortage was likely even higher as the price of the metal rose from a low of $1256.50 in early May to over $1875 per ounce at the end of 2019. The deficit remains significant as the total annual global output of the metal is around seven million ounces or 218 metric tons, and gross demand was 11.154 million ounces. While recycled metal provided additional supplies of 3.349 million ounces, it was not nearly enough to meet the growing demand.

While fundamentals could be telling us that the $2000 per ounce level will give way in 2020, platinum is a denser metal with higher resistance to heat than palladium.

Source: Johnson Matthey

The chart shows that Johnson Matthey projected that platinum would also move into a deficit in 2019 after a surplus weighed on the price of the precious metal in 2017 and 2018. Platinum rose from under $790 in May to the $958 per ounce level on December 30.

Meanwhile, at an over $900 per ounce discount to palladium, industrial consumers could begin to substitute platinum for palladium in 2020 as the deficit looks set to continue. Any improvement in global economic conditions would likely increase demand for both platinum and palladium in 2020.

The downside risk in the palladium market has increased dramatically, given the four-fold price increase since January 2016. The bearish price action and correction on December 20 could be a sign of things to come as volatility is likely to continue to rise with the price of the metal in 2020. Sudden price spikes to the downside could become the norm, and if the deficit expands, price vacuums to the upside could follow. Trading and investing in highly volatile commodities can be like riding a psychotic horse through a burning barn. The parabolic price action in the palladium market looks set to continue into the new decade. However, the path to higher prices could be a wild ride.

PALL is the palladium ETF product

The most direct route for a risk position or investment in palladium is via the physical market for bars and coins. The deficit and limited supplies can make premiums to the market price very expensive for these products. The NYMEX palladium futures have a delivery mechanism, which guarantees smooth convergence between physical and futures prices during delivery periods.

The Aberdeen Standard Physical Palladium Shares ETF product provides an alternative to physical or futures. The most recent holdings of PALL include:

Source: Yahoo Finance

PALL has net assets of $280.49 million, trades an average of 31,912 shares each day, and charges holders a 0.60% expense ratio. As of December 30, the price of palladium was 56.6% higher in 2019.

Source: Barchart

The chart shows that PALL moved from $119.05 on December 31, 2018, to $179.82 on December 30, 2019, an increase of 51% as it marginally underperformed the price action in the continuous palladium futures contract.

GLTR has some exposure to palladium, but is diversified

For those looking for a more diversified approach to precious metals in 2020, the Aberdeen Standard Physical Precious Metals Basket Shares ETF holds physical palladium as well as gold, silver, and platinum. The most recent top holdings of GLTR include:

Source: Yahoo Finance

GLTR has net assets of $463.08 million, trades an average of 24,328 shares each day, and charges holders a 0.60% expense ratio.

Source: Barchart

GLTR closed at $63.16 at the end of 2018. At $76.13 per share on December 30, the ETF product was a bit over 20.54% higher on the year.

Palladium looks like higher prices could be on the horizon in 2020 as the metal approaches the $2000 per ounce level. However, it could be a very bumpy ride as parabolic markets can suffer brutal setbacks. A 50% rise in 2020 would put palladium over $2800 per ounce. If the price of the metal is heading there, gold, silver, and platinum are likely to experience significant gains.

The Hecht Commodity Report is one of the most comprehensive commodities reports available today from the #2 ranked author in both commodities and precious metals. My weekly report covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. I just reworked the report to make it very actionable!

I am offering a 20% discount for an annual subscription to my service, The Hecht Commodity Report, through December 2019. With the holiday spirit in mind, I am offering a free trial to the service. You can sign up via this link. My seven comprehensive quarterly reports for subscribers will come out starting on the first day of 2020.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.


Tags: , , , , , , ,

Comments are closed.