PALL Vs. GLD: Palladium, The Wise Man's Gold?

by: Kellie Peterson

"When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold." "I called gold the ultimate bubble, which means it may go higher. But it's certainly not safe and it's not going to last forever." -George Soros

Safe-Haven?: Gold has long been considered the place where either a conservative investor or a terrified one, places their money. The main reason for its consideration as a conservative investment has been the fact that currencies around the world use it to back their value. That equates to a built-in demand on a global scale, and as an investment, gold has been the way to go for these 2 types of investors for a long-running history, but times have changed.

Protection from a falling market needs to be reliable if the hedge one is looking at is supposed to either be contrary to general market-action or at least have a low enough beta so that it goes down much less in a crash. This statement used to be one that defined gold, but that was before gold became a "hot ticket", attracting retailers, hedge funds, and mutual funds alike. Gold used to be boring, reliable, and where one would stash money one did not want to be affected by the volatility of market swings.

Not So Precious Metal: Though gold still has value, and at around $1300 for a measly ounce it's hard to argue that, the dynamic of the population who own it has changed, and along with that, its "modus operandi." With the introduction of ETFs, in recent years, which are designed to track gold and its mines (GLD, GDX, GDXJ) this commodity has suddenly become available to anyone and everyone with an E*TRADE or similar account. Whereas before, one would have had to purchase a mutual fund which buys gold, buy the physical form of gold in jewelry or bullion or buy futures on the CBOE in order to take part which is arguably more sophisticated and not something the average 'Joe' would do. With these new easy ETFs we have seen millions of new investors take part in gold ranging from scalpers to your neighbor, trying to get a piece of the action. A new group of investors with a different mentality causes the underlying commodity to act in new ways.

Today we could consider gold to be much more similar to an equity than to a safe-haven commodity. That is not to say that it follows the markets, but that it can no longer rest on the laurels of stabilization it used to enjoy from being the world's currency backer. It is now akin to all the stocks out there which have gained attention from either their performance or their expected performance like Apple (AAPL), Netflix (NFLX), Facebook (FB), etc. And like these stocks, it has become a volatile animal! Here is the one year GLD chart:

New Rationale For Owning Gold: We've now figured out that the old reasons for owning gold are no longer appropriate, so why would one want to own it today? It still has merit as a small piece of a portfolio with the objective of appreciation in price. And at current levels we are seeing many arguments for more volatility with some saying it will fall to $900/oz and others claiming $2000/oz will be reached by 2014. Quick analysis of those hypothetical numbers is approximately 30% to the downside and 54.9% to the upside. That's just an insane spread and tells me that nobody has any real clue as to what we can expect in the near future of gold prices.

Technical Analysis: Looking at GLD from a technical point of view, we see:

  • Feb 11 2013: GLD fell below its 200 day moving average (having been below its 50 day for over 2 months already)
  • April 12: fell below what was thought to be strong support of $150 and confirmed short-term bear market for gold
  • April 15: Gapped way down and fell through support of $140 to close at $131.31, down 8.78% for the day
  • June 20: created new 52 week low of $123.33 raising questions of potential longer-term bear market
  • Next support levels: $122-$120 found on the chart all the way back in June 2010, $115 range in Nov 2009, then all the way to $100 in Feb 2009...

GLD Forecast: GLD needs to make some bold moves to the upside to get out of what has become an ugly Bear-trend with strong momentum. If it can fill the gap created on April 15 to $143.95 we are looking at 15% to the upside and beyond, but it has to overcome new resistance in the $130-$131 range to do so, and even that is almost 4% away. The outlook for gold is at best an uncertain picture, and at worst, a way to deflate your portfolio.

Alternative Precious Metals: If the analysis above didn't scare you and you think that gold is still a "hot ticket" then you would have to think that SLV or silver, is an even hotter ticket. SLV moves the same direction as GLD almost every day, but with much more oomph.

  • 52 weeks: GLD -18% SLV -25.8%

Clearly, when going down, SLV underperforms GLD, but the opposite is also true, so if you are confident GLD is going up you would benefit more from a holding of SLV, though would also be subjecting yourself to higher volatility.

I am not so confident in gold or silver, and having researched ALL of the metals, I've found that I would much rather be involved with one that is not so popular but has its own unique merit with tremendous potential.

PALL & SWC: For now, palladium is a relatively undiscovered entity, at least as far as the general population of investors is concerned. PALL (ETFS Physical Palladium Shares) is the ETF best used in U.S. markets to trade Palladium. And with a 3-month daily average volume of only 123,066 (Yahoo! Finance) you can see not too many people are using it, YET! There are a couple other ETFs, but none are a pure Palladium play and include Platinum or other metals as well. Stillwater Mining Co. (SWC) is the preferred equity for Palladium mines, although it is not strictly a Palladium mine and does have an interest in finding and exploiting other metals, Palladium and Platinum are what its known for.

Palladium Fundamentals: Less supply and more demand (what more could you ask for?)

  • 2 main countries responsible for almost 80% of Palladium Supply: South Africa and Russia
  • Russia has long been rumored to be running out of Palladium and the past 2 years' sharp declines in sales backs this rumor up
  • That leaves South Africa to become the sole largest producer:
  1. This causes Palladium to be tied to fluctuations from the South African Rand (its currency, which has been depreciating for over a year now)
  2. And also subject to moves from labor problems in the mines of South Africa (one of the reasons for the falling Rand) which were responsible for a loss of 250,000 ounces last year
  • Over 60% of the demand for Palladium comes from its use in catalytic converters in gasoline engine automobiles, which has risen mostly from an increase in automobile sales in China and the U.S. (from Thomson Reuters GFMS (click here))
  • The overall worldwide supply to demand is at a deficit, in other words, there is not enough Palladium being mined or salvaged on an annual basis to meet the demand which is increasing

  • 52 weeks: PALL +10.51%
  • The slow stochastic and the RSI just began to turn to the upside on Friday June 21
  • As is apparent from the chart above, on the upside there is little resistance until $70 and then $75, or +5.5% or +13.05% respectively. And though it broke the $65 support on its way down it was only by a few cents and then it recovered.

Comparison and Conclusion: If it's GLD, GDX, GDXJ or SLV you're considering putting in your portfolio, I would strongly suggest giving PALL and SWC a nice long look.

On a percentage basis PALL, over the last 52 weeks, outperformed:

  • GLD by more than 28%
  • SLV by more than 36%
  • GDX by more than 54%
  • GDXJ by more than 61%

SWC had an even better 52 week return than PALL, coming in +21.23%.

The idea I am trying to convey here is that one does not need to follow the crowds towards the popular, and in this case, far inferior investment. Even if you aren't willing to stop buying gold, at least research Palladium for yourself to see what's out there. For now Palladium is not revered as gold is, but in the long-run, it will outperform its precious metal cousins and make a name for itself in the financial community of the future.

One of the reasons I decided to get into SWC in this article is because of the weak volume in PALL. I understand the need for liquidity and many would not take a risk on an unfamiliar ETF with a volume of less than 1 million share a day. SWC has been around since 1992 and is a U.S. company based in Montana. They have excellent cash flow and their YOY quarterly earnings growth was up 145.5% (Yahoo! Finance). If you want to take advantage of Palladium and have the liquidity you're used to, SWC is a great buy right now. And when I say "right now" I mean it, the technicals are showing the same for SWC as were discussed above for PALL. Both of them are turning to the upside and will run for a while. If you are tempted by these 2, I would not wait too long for entry.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SWC, PALL over 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. This article is for entertainment purposes only and is not a solicitation to buy or sell any equity.