Certainly, you'd expect an ETF's share float to increase with retail investment demand, and there's perhaps no better example of that than the ETFS Physical Palladium Shares (PALL).
Effective May 26, the number of authorized PALL shares ballooned from 12.88 million to 18.8 million. Not that there are 12.88 million shares outstanding, mind you. It's just that the share float could grow to that size, if need be.
In reality, there are just 7.9 million shares currently outstanding, and the latest prospectus filed with the SEC ratchets the float up to only 10.75 million shares.
One share of PALL represents the approximate value of one-tenth of one ounce of the underlying metal. So at current prices, the increased flotation means the palladium backing the trust can now grow from its present level of 788,400 ounces to nearly 1.9 million ounces.
Of course, further growth in PALL's inventory would make the trust a bigger player on palladium's relatively small stage. According to the most recent prospectus filed by PALL's sponsor, ETF Securities, the total global palladium supply in 2008 amounted to only 8.4 million ounces.
But let's get back to talking about shares. Keep in mind that there's a big difference between a security's authorized float and the number of shares actually held by the public. As with other exchange-traded grantor trusts, the creation and redemption of PALL shares involves "like-kind" exchanges of metal plate and ingots for paper. The minimum trade is a basket of 50,000 shares.
Creations and redemptions of PALL are done only by large investment banks/dealers or by institutional traders known as authorized participants. In contrast, the hoi polloi trade PALL shares in the secondary market on a cash-for-shares basis, just like regular stock. The ETF's float isn't affected by transactions brokered between retail investors.
This distinction becomes more evident when you consider the recent money flows into and out of PALL shares, because when you look at money flows, you're actually tracking investors as they vote with their feet:
PALL Closing Prices and Money Flows
Note the double top in the money flow index posted in mid-April, even as prices continued to climb. Since then, prices have followed money flows down and out of PALL.
You get a very different picture when you regard the build in the trust's palladium inventory. Since April 14, the trust's ingot and plate holdings have increased by more than 29 percent:
PALL Closing Prices and Holdings
Palladium inventory levels represent the potential for future wholesale share transactions. Metal goes in as shares go out — into institutional hands.
So, are the big guys building up their inventories of PALL shares for investment or for market-making purposes? In other words, is there a pool of PALL liquidity waiting to drench retail investors should prices rise?
More to the point, will prices rise?
Well, no one has a crystal ball, but it's clear that palladium's parabolic price trajectory couldn't be sustained indefinitely. Nearby futures prices peaked on April 26 near $574 and broke to the downside to test the metal's 200-day moving average at the $398 level. Since then, prices have recovered to hold above the 10-day moving average at $445. If the market stretched to a close above $480, bulls might be encouraged to push toward a test of the 50-day moving average, which sits above $503.
Weekly Palladium Futures
Even if that happens, that really reflects normal market volatility for palladium. There's still a millstone ‘round palladium's neck. As we've seen recently, investors' notions about economic recovery are very fragile. Another scare — more particularly, renewed concern about a recessionary double-dip — could send palladium prices southward again. And if prices dipped under $415 in the nearby contract, that 200-day moving average comes into view again.
To translate this into PALL terms, trust shares are now supported at $44.80. A close above the $48.36 level would likely set up a test of the trust's 50-day moving average at $50.41. A break below current support, though, makes the $40 level the downside objective.
Disclosure: No positions