GLD Vs. PALL: Gold Continues To Underperform

Jul.22.13 | About: ETFS Physical (PALL)

"Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head." -Warren Buffett

Preface: The purpose of this article is twofold:

  1. Update from previous article written on June 25 this year to analyze how those conclusions have performed (GLD vs. PALL)
  2. Provide new updated thesis and investing outlook for Palladium and its respective mines.

Performance of Previous Conclusions:

My last article on Gold and Palladium (PALL vs. GLD: Palladium, The Wise Man's Gold?), written only 3 weeks ago, needs a follow up due to the accuracy of its conclusions in such a short time. The markets have been admittedly lucky for the timing of that article at least in so far as how strong ETFS Physical Palladium Shares (NYSEARCA:PALL) and Stillwater Mining Co. (NYSE:SWC) have performed relative to SPDR Gold Shares (NYSEARCA:GLD). My previous conclusion was that Palladium or PALL and the main mine used to play Palladium, SWC, were a much more attractive investment than Gold, GLD, or Silver, SLV (iShares Silver Trust). This comparison chart from June 25 - July 19 simply makes the case (chart courtesy of FreeStockCharts.com) (GLD is the green line):

Click to enlarge

In only 18 days of trading:

  • PALL up 12.32%
  • SWC up 12.05%
  • GLD up 1.33%
  • SLV down -.16%

The gains of PALL and SWC have an impressive spread over the performance of GLD and SLV, but to be fair to my last article, we also have to look at the gold mines which were mentioned there: Market Vectors Gold Miners ETF (NYSEARCA:GDX) and Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ); same time frame (chart courtesy of FreeStockCharts.com):

Click to enlarge

So clearly the gold mines outperformed their underlying commodity but still did not perform as well as either SWC or PALL:

  • PALL up 12.32%
  • SWC up 12.05%
  • GDX up 9.3%
  • GDXJ up 11.09%

Let's look at a hypothetical of $10,000 invested 50/50 in PALL & SWC vs. GLD & GDX, and GLD & GDXJ (starting June 25 - July 19):

  • Average of SWC + PALL = +12.185%........$10,000 = $11,218.50
  • Average of GLD + GDX = +5.315%............$10,000 = $10,531.50
  • Average of GLD + GDXJ = +6.21%.............$10,000 = $10,621

So if you had gone the Gold way, the best you could have done would have been underperforming the Palladium combo by 49.03% with the GLD + GDXJ. For those of you who took the last article to heart, or to wallet, kudos! And congratulations on a really nice short-term gain! But what do we do from here?

Predicting the future, again:

My previous article stated boldly that PALL and SWC were an immediate BUY, so let's see if we can come up with such a concrete direction this time.

The first thing we have to look at is what is going on with Palladium? Nothing has really changed in the past 3 weeks except for the appreciation in price, but as far as the factors which drive that price, they remain relatively the same.

  • Russia is still putting less Palladium on the market
  • South Africa is still in turmoil with mining strikes and wage inflation problems
  • The demand for Palladium in catalytic converters for gasoline engines is still rising (which still accounts for over 60% of its use)

These 3 factors equate to a lower supply and a higher demand, which was the same position we found ourselves in 3 weeks ago. Since none of the catalysts look different, we have to turn to other indicators to shed some light on future movements.

2 Alternate Indications of Future Price:

When the fundamentals haven't changed, we have to look for the rest of the picture for our future pricing. Technical indicators and options activity are my last resort.

Looking at the 3 technical indicators I use most frequently; RSI, Slow Stochastic, and MACD; I have to conclude that PALL is about to turn down for a short time. Looking at a one year chart, the slow stochastic is not as high as it has been in the last 52 weeks but pretty darn close and the kicker is that the RSI is higher than it has ever been in that time period. Though it is possible for the stock price to continue to rise, the likelihood is for a correction. The MACD does not help much in this case as it is a longer-term indicator and tells us more of the trend. Right now, it is on its way up but seems to be nearing a peak and it is too difficult to tell if it is at the peak or not. If I was basing a BUY or SELL recommendation off those 3 indicators alone I would have to say SELL.

As for SWC, the slow stochastic is high but also just widened again indicating it can still continue upward and the RSI turned slightly down but did not reach anywhere near the highs it has seen over the last year. This indicates selling pressure may not be at the max, or may still have some steam to gather and the price can still rise. The MACD for SWC is similar to that of PALL and in this case is also not very helpful.

One bright light at the end of this tunnel of analysis is the options activity on SWC. Options can provide insight into the general sentiment of investors because with enough volume they can show that investors are willing to bet with a substantial amount (on a percentage basis) that a stock is going to rise or fall. In this case, the near-term near-money strikes are over 3%.

  • SWC closed at $11.62 on Friday the 19th of July
  • The current price for an August $12 CALL is $0.40, or 3.44% of the share price. That means investors are willing to risk 3.44% on the bet that in four weeks, by August 17th, SWC will be at or above $12.41. From our close of $11.62 that would be a 6.8% rise in price.
  • Looking a little further out, the October $12 CALL last traded for $0.85 or 7.3% of the current share price.

The further out we go, the less the options help as an indication of sentiment due to the time premium which is added. The longer you have for a stock to go up (or down) the more someone is willing to bet it will get to that price, and therefore it is difficult to tell if what we are seeing is time premium or valuation of the stock. That being said, these two calls are enough evidence to at least consider future appreciation of SWC.

Conclusion:

I'm still an advocate of investing in Palladium as opposed to Gold, but at the moment I think PALL is not a BUY. If you own it, my recommendation is to place a stop loss around $72.50 and buy it back cheaper. SWC on the other hand seems to have more room to run and I could see it easily breaking the $12 mark by options expiration next month and I am generally looking for another 6.5-9% upside.

These recommendations are for the investor who doesn't mind getting out at the highs and in at the lows, but for those who have a much longer view, PALL is a story unlike any other precious metal. We have shrinking global supply and growing annual demand from the automobile industry greatly in China and the US. If we were talking about corn, wheat, or soybeans the whole world would be paying attention, but because it's Palladium, nobody notices! The long-term outlook for Palladium is tremendous and the fact that the average 'Joe' is unaware of that, so far, makes it even better. Let's close with a little more Warren Buffett, "Rule No.1: Never lose money. Rule No.2: Never forget Rule No.1."

Disclosure: I am long SWC, PALL. 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: This article is for entertainment purposes only and is not a solicitation to buy or sell an equity.