Why Is Palladium Bucking The Trend In Precious Metals?

| About: SPDR Gold (GLD)


Precious metals are under siege.

Palladium’s performance has been impressive.

Industrial commodities rule.

Automobile demand for palladium rather than platinum.

The prospects for the thinly traded precious metal.

The world changed for many markets after the November 8 election in the Unites States. The pollsters got the election wrong and most market analysts got the reaction to the election completely wrong. Before the election, any thought of a stock market rally following a Trump victory may have brought laughs from many market analysts, but that is exactly what happened.

During the campaign season, many world leaders expected Hillary Clinton to be the next leader of the U.S. Some publicly supported the Democratic candidate and had few positive things to say about President-elect Trump. Therefore, the rally in the dollar following the surprise election was not exactly the result that many expected.

At the end of the campaign season, it appeared that a surprise in the U.S. that mirrored the post-Brexit markets would create more fear and uncertainty for the future. However, the bearish price action in precious metals markets since election night has been a shocker to many. All the while, one of the precious metals, palladium, has bucked the trend in the sector and the price is now at the highest level since June 2015.

Precious metals are under siege

It has been an ugly path for most precious metals since Election Day. Click to enlargeSource: CQG

The price of gold gas declined from $1341 in the immediate wake of the election to lows of $1172.80 last Friday on the now active month February COMEX futures contract. The decline of over 12.5% in three weeks has caused gold to fall below technical support and has reversed the trend on the long-term monthly chart from bullish to bearish. Gold recovered slightly from last week's lows as was trading at the $1189 level on Tuesday, November 29. Click to enlarge Source: CQG

Over the same period, silver has dropped from $19.12 to lows of $16.245, a decline of 15%. Silver was trading at $16.63 on Tuesday. Click to enlarge Source: CQG

The price of platinum moved from $1023 to lows of $908.10 last week. Platinum was at the $920 level Tuesday, it moved 11.2% lower.

The Trump effect has been bearish for the most actively traded and watched precious metals. The dollar has broken out to the upside and interest rates have moved higher over recent weeks contributing to the weakness in precious metals. However, for one metal in this sector, the market reaction has been different.

Palladium's performance has been impressive

Palladium is a platinum group metal and the production of catalytic converters for gasoline-powered engines require the metal. Palladium is a metal that has a high resistance to heat and its role in cleaning poison emissions from the environment in the U.S. and other nations around the world has likely contributed to its recent price strength. Click to enlargeSource: CQG

As the daily chart of NYMEX palladium indicates, the metal has appreciated from $620 per ounce before the election to highs of $767.55 on Tuesday, November 29. The increase of 23.8% after the election while gold, silver and platinum posted significant losses has lifted the industrial precious metal to the highest price since June 2015.

Industrial commodities rule

Palladium is not the only metal that is posting gains over the past three weeks. Click to enlarge Source: CQG

The weekly chart of March copper futures shows that the red metal made lows of $1.9355 in January but it continued to make lower highs until November and Election Day. The prospects for an infrastructure building project in the United States caused copper to break out of its bearish trading pattern and the price has increased to highs of $2.7530 on Monday, the highest price since May 2015. Some selling in copper took the price back down to the $2.60 per pound level on Tuesday. Other nonferrous metals have also posted gains with aluminum, nickel, lead, zinc, and tin all posting gains since the election and registering double-digit gains in 2016.

Meanwhile, other industrial commodity prices have also been on the move higher. Click to enlarge Source: Bar Charts

The price of December iron ore futures, the critical ingredient in the production of steel, has increased from $67.40 per ton on November 8 to $75.25 on Tuesday. The increase of 11.6% came at a time when most analysts expected the commodity to fall below the $50 per ton level on a glut of supplies. As you can see, industrial commodity prices have done quite well over recent weeks.

Automobile demand for palladium rather than platinum

Both platinum and palladium have utility when it comes to catalytic converters. Traditionally, platinum is the metal employed for diesel powered engines while palladium is better suited for gasoline engines. Additionally, platinum has a financial application as some investors hold platinum as they hoard gold and silver, as a hedge against uncertainty, fear and inflation. However, palladium is hardly an investment metal given its volatility and lack of liquidity when compared with other precious metals.

The incoming President ran on a platform of energy independence, fewer regulations and support for the U.S. domestic oil and gas industry. The policies of the Trump administration will likely cause the cost of production for crude oil and refined oil products to fall, increasing output and lowering the attractiveness of alternatives such as diesel and electric automobiles. Additionally, while palladium participated in the bull market in precious metals that began in early 2016, it never attracted the investment demand that its precious cousins did.

The prospects for the thinly traded precious metal

The prospects for palladium currently look a lot better than for the other precious metals. The incoming President will attempt to attract car manufacturers back to the United States by renegotiating trade agreements, cutting corporate taxes and lessening regulations. More automobile manufacturing in the U.S. will increase the demand for palladium. 80% of the world's annual palladium output comes from Russia with the balance from South Africa which means that supply issues could become a problem at times in the future. Given the limited supplies from only two nations, it is likely that stockpiling of the strategic metal will occur in the months ahead.

Click to enlarge As the monthly chart of NYMEX palladium illustrates, the next level of technical resistance for the metal is at $803, the May 2015 highs. Palladium was trading at $766 per ounce on Monday and there are no signs that the trajectory of the metal is changing on a technical basis. Palladium has moved higher for five consecutive weeks. Given the price action of industrial commodities since the election, which could be a game changer, the prospects for palladium continue to look bullish.

Infrastructure building will lift the prices of many raw material markets in the months and years ahead. With both the Congress and Senate behind the incoming President, there is not likely to be much opposition to his policies and the promises articulated on the campaign trail.

It is hard to buy a commodity like palladium after it has rallied by over $140 since a little more than one month. However, the fundamentals are looking up for palladium and buying on pullbacks could be the best strategy when it comes to the metal. For those who do not trade in the futures markets, the ETFS Physical Palladium ETF product (SYMBOL: PALL) is another way to approach the metal as an investment. PALL has over $179 million in net asset value and it trades an average of 30,800 shares each day.

Gold, silver and platinum have lost their luster over the past few weeks but palladium is one metal that continues to shine when it comes to the price and prospects for the precious metal with lots of industrial applications.

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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.