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
John
Townsend invites you to visit his website at www.theTSItrader.blogspot.com. He usually offer a few
posts each day on his market observations, often comment on the
particular stocks he is currently trading, and tries to show ways to use the
True Strength Index indicator to make some sense of where the precious metals
and their miners are heading. Please do not hesitate to contact him.
