Palladium
to the Moon & PAL to the Sun
By John Townsend, The TSI Trader
Many investors are aware of the price movement
in gold and silver of late, but have you looked at Palladium? Palladium has exploded right past the entire field of commodities along with
the little sister of Gold, which is Silver. Both precious metals have logged sizzling
80%+ gains, year to date. Palladium
related mining stock North American Palladium Ltd (PAL:AMEX) has done even better
than the little brother of Platinum, with a year to date gain of 90%.
As incredible as both the metal Palladium and
the Canadian based miner PAL have
performed in 2010, I think their run towards the sky is far from over. Let’s begin our examination with a chart of the
world supply and demand for Palladium.
This data, released literally a couple weeks
ago, shows that for the first year of this decade, 2010 supply and demand for Palladium
were in balance. We also note that for
the first year in 10 years, supply was not
greater than demand.
One of the obvious precursors of significant
price appreciation is a shortage of supply, and this development appears to be
in the pipeline at this time. For
starters, the enormous overhang of a multi-decade surplus of Palladium in
Russia is now thought to be virtually exhausted. Secondly, as the primary demand for the metal
is related to its use in the exhaust systems of vehicles (catalytic converter),
the demand shortage scenario now appears inevitable with the projection of
increased car production not only in the United
States , but also China
and India .
And finally, the demand side of the equation is
being aggressively stretched by investment demand, ETFs, coins and jewelry
primarily, as the precious metals secular bull market enters its 10th
year. As a matter of fact, on November 30th
the US Senate unanimously approved the coinage of a $25
face value Palladium bullion coin with a
Mercury-head design and a weight of 1 ounce. And just the past week a new ETF launched that
is backed by
physical metal and weighted 55 percent in Silver, 33 percent in Platinum
and 12 percent in Palladium. This ETF, issued by ETF Securities Ltd. of
New York, trades with the ticker symbol WITE
on the NYSE Arca exchange.
Investors are increasingly seeking tangible investments
that will hedge themselves from the present and increasing ravages of both
inflation and the concurrent debasement of their currency. Without a doubt, the creation of new
investment vehicles for the investment community will continue to bring in new
investment dollars to the precious metal sector, but also effectively take a
noticeable chunk of Palladium supply off the market. This is to say that Palladium that could have
been used to make car mufflers, jewelry, dentistry alloys and a host of
corrosive resistance applications, will either be sitting in a bank vault in
Zurich to back up a new ETF fund or in someone’s coin collection.
The history of Palladium’s price is
interesting. Palladium was valued at $35
an ounce, along with Gold, from 1930 to 1961.
Its price then slowly gravitated higher until it spiked to $150 in 1974
(Gold simultaneously spiked to $200), after which it resettled in the $60
range. But Palladium did not stay there
long and as Gold made its early 1980 peak of $850, Palladium spiked even higher
than previously, to $275. Following a return
to the $60 range in 1982, Palladium was range bound between $100 and $150 until
1997. Beginning in 1997, Palladium began
a sharp ascent from $100, reaching $400 by January of 2000. During the year 2000, Palladium virtually went parabolic,
appreciating nearly 200% in a single year from $400 to well past $1,000 an
ounce. During this same time frame (1997
– 2001), gold was basically asleep, rarely succeeding to even surpass $300 an
ounce.
The following chart yields a closer look at the more
recent price history of Palladium.
Additionally, I have superimposed the concurrent price performance of
Gold (blue) onto this 10 year chart of Palladium (red) for relative comparison.
Palladium’s highest price of $1,090 was achieved
in January of 2001. This occurred, in large
part, due to a threat Russia
made to refuse selling its reserve stockpiles in the forthcoming calendar year
of 2001. The Ford Motor Company
contributed to the metal’s panic due to this threatened potential shortage in
supply, by hoarding Palladium for fear of not having enough Palladium for their
car manufacturing usage with catalytic converters.
It turns out that the Russians subsequently and ‘magnanimously’
decided to make their excess Palladium available for sale in 2001 (once they
had scared the market price up from an anemic $100 to over $1,000). But then Ford was holding a bag that was filled
with rapidly depreciating Palladium, as the Russian decision to provide more
supply caused price to plummet. So Ford decided
to unload its excess bounty, further driving
the price of Palladium all the way down to $150 per ounce by early 2003.
Palladium’s high of March 2008 at $600 (coinciding
with a spectacular C wave parabolic in both Gold and Silver) was unsuccessfully
matched by the April rally earlier this year. However, the price action of the
past three months has successfully taken out that previous landmark. The chart above shows that this important and
major break out point ($600) occurred just a few months ago.
It would appear, speaking as a technician that Palladium
will now continue to rise until it reaches the 2001 all time high of $1,090. That feat, in itself, will amount to a 45%
rise in Palladium price from current
levels. Judging by the trajectory of Palladium’s parabolic move in progress,
which is now uninhibited by further
price resistance levels, I cannot imagine it will be long before price arrives
at a new all time high.
That Palladium will appreciate another 45%,
considering the current environment of currency debasement and inflationary
pressures, is a given in my
mind. What is interesting to ponder,
however, is the miner North American Palladium Ltd. (PAL:AMEX) as an
investment alternative to simply buying the ETF Physical Palladium Shares (PALL:NYSE Arca) or the ‘soon to be minted’ bullion coin.
So let’s now examine a 10 year chart of the only
significant pure Palladium miner outside of either Russia or South Africa, North
American Palladium Ltd. (PAL)
First off, we know that the price of Palladium
is now higher than at any time since January 2001. But curiously, the stock price of PAL is not anywhere near as high today
as the numerous $12 peaks in the past decade.
In fact, it is barely more than half
that price at last week’s close of $6.34. This observation alone tells me that
a price of $12, while roughly a rise of 100% from current levels and commiserate with previous highs, is still
not even close to a fair PAL price
level, as the underlying Palladium metal is trading at 9 year highs - higher than at any time PAL has previously traded
at $12.
I have calculated that the average price
relationship between spot Palladium price and PAL stock price for most of the past decade was about 50:1. For example, a stock price of $5 for PAL would roughly equate to a spot Palladium
price 50 times greater, or $250. At
today’s spot price of around $780, PAL
should be trading at $15-16.
But honestly, North American Palladium Ltd (PAL) has not had a single profitable
year in the past 5 years, at least. And
yet the stock traded up to $10 and $12 on several occasions within this
timeframe. Now guess what? This past quarter analysts expected the
company to lose 3 cents a share.
Instead, PAL blew out those
estimates with a positive performance of 2 cents a share. Analysts are now expecting PAL to earn between 30 and 46 cents per share for 2011E. As PAL share price has a history of reaching
$12 with negative earnings, imagine
what the share price will be when the company starts logging in a string of explosively profitable quarters.
My hunch is that when Palladium retests its
historic high of $1,090, as I believe it will sometime later this spring, PAL should trade at something in the
neighborhood of $22. That would be an
appreciation of nearly 200% from the current level of $7 per share. And this return would certainly annihilate the 45% anticipated return of
simply buying some Palladium coins or the palladium ETF PALL.
I have listened to the CEO’s 20 minute December
2nd presentation at the Scotia Capital Mining Conference in Toronto , Canada . The webcast and
accompanying slide presentation are available on the Company's website at www.nap.com.
If you have 20 minutes and are interested in doing some due diligence of
your own, I highly recommend you give his presentation a listen.
If we take a look at the monthly price chart of PAL
and use the True Strength Index (TSI) momentum indicator to assess its
prospects for price appreciation, one observes that this stock could very well
be in the early innings of a major price move from current levels.
Generally speaking, when the True Strength Index
(TSI) indicator is rising above the ZERO Crossover line, price is always rising. Also, when there has been a trend line break
of the indicator, as I have drawn using a green line, it signals a significant
and extremely reliable BUY opportunity.
My disclosure it that I own some shares of North
American Palladium Ltd. (PAL), but
not nearly as many as I will after this weekend.
Best
wishes for your trading and investment success.
John
Townsend
The TSI Trader is a website
dedicated to the deployment of the True Strength Index (TSI) indicator for buy
and sell signals related to gold’s secular bull market. The TSI indicator is freely available at FreeStockCharts.
Thank you for great analysis.
ReplyDeleteYou ability to tweak time scale and indicator parameters to match the point is amazing.
Link to the nap.com is broken by the way.
Thank you Andrey for writing. The link was indeed broken and thank you for helping me get it fixed!
ReplyDeletejohn take a look at tgb taseko mines and tell us what you think please
ReplyDeleteI've been looking at this today since I've just discovered your site. Looks like its back to your original buy level now, and according to the TSI methods you use that I've studied the past few hours, it looks like it is heading for a rally. I think I'll look into buying this tomorrow.
ReplyDeleteI'm really liking your style by the way, congrats on the incredible 6 month track record.