Palladium – A Harbinger For Precious Metals

When it comes to the precious metals sector, the leader since the beginning of 2016 has been the metal that receives the least amount of attention from the financial press and most market participants. During the second week of January 2016, the price of palladium fell to the lowest level since August 2010 when it traded at $451.50 per ounce. Since then, the industrial precious metal has done little but rally. The vast majority of palladium production in the world comes from Russia and South Africa. In Russia, the output is a byproduct of another industrial metal, nickel. In 2016, palladium registered a 21% gain. In Q1 of 2017, palladium added another 17.5% to its price and in the second quarter of this year, it rallied by another 4.8%. Palladium closed at the end of Q2 at $836.65 per ounce, and as of the close of business on Friday, August 25, it was trading $931, another 11.3% higher than the price on June 30.

Palladium is the least liquid precious metal that trades on the futures exchange with the smallest open interest and lowest trading volume. However, palladium has been a bullish beast for the past one and three-quarter years. It has led all of the other precious metals on a percentage basis and could prove to be a harbinger for the rest of the sector. The prices of gold, silver, and even platinum could soon follow the bullish path of the industrial precious metal that has shined brightest.

Palladium breaks the hurdle on its way to an all-time high

The price of nearby NYMEX palladium futures first traded above $900 per ounce at the beginning of June which was the first time the precious metal reached the lofty level since September 2014. Palladium spent the period from June through early August trading in a range from $825 to $900, probing above the level on several occasions. Source: CQG

As the daily chart highlights, palladium finally broke and closed above the $900 per ounce level on August 16. Source: CQG

As the weekly chart illustrates, the price also broke and closed above critical technical resistance on August 16 when it rose above the September 2014 highs at $912 per ounce. Source: CQG

As the quarterly chart shows, that $912 level was the only price standing in the way of a challenge of the all-time peak price for palladium at $1090 per ounce back in 2001. The industrial precious metal has now set its sights on the all-time high from a technical perspective. September palladium futures closed on August 25 at the $932 per ounce level.

Palladium has been the leader of the pack in the precious metals sector since the beginning of 2016. However, the price action in August could be a sign that its precious cousins, gold, silver, and platinum are ready to join the bullish party and lurch higher over the weeks ahead.

Gold is close to a breakout

Of the three remaining precious metals, gold is closest to following palladium as of the close of business on August 25. Source: CQG

The weekly chart shows that in 2017, gold has traded in a range from lows of $1146.50 at the beginning of the year to highs of $1300.70 in the middle of August. Source: CQG

On the active month December futures contract, technical resistance stands at the April 17 highs of $1307 per ounce, and above there the 2016 highs of $1377.50 would be the next technical level on the upside. As of the close of business on August 25, gold was close to the top end of its trading range and a technical breakout as it ended the week at the $1297 per ounce level on December futures.

Silver can get there fast

Silver has traded in a range from lows of $15.145 on the active month September futures contract to highs of $18.78 on April 17. The midpoint of the range is $16.9625 per ounce, and silver was trading at just over $17 per ounce on Friday, August 25. While silver is almost $1.75 below its high for the year, the volatile precious metal has a long history of exploding higher or imploding lower quickly once it begins to move. Source: CQG

As the daily chart shows, we have seen lots of implosions in the silver market in 2017. The latest round came after the flash crashes in the COMEX gold and silver markets that occurred during illiquid times of the trading day. On June 26 a huge block of gold selling hit the market during European trading hours, and on July 6 a big silver sell order hit the market during Asian hours. However, both precious metals have recovered from their July 10 lows, and now silver appears to be overdue for an upside explosion in price.

Platinum could be a sleeping giant

Silver and gold have been showing signs that they are preparing to move higher, perhaps a lot higher, over coming weeks. However, platinum could be the metal that stands to gain the most if the sector catches on fire. Platinum has been a dog since 2014, and last year it traded to the lowest level against gold in modern history when it fell to a $360 per ounce discount. For many years, platinum’s nickname, “rich man’s gold” was a result of the premium platinum traded at over gold. However, these days platinum has been poor man’s gold as it continues to trade below $1000 while gold is flirting with the $1300 per ounce level. Platinum is a rare industrial metal, but it also has a history as an investment asset.

Palladium and platinum both have high resistance to heat; they melt and boil at very high temperatures. Platinum has a higher density than palladium and a slightly higher melting and boiling point. Therefore, both metals have many industrial applications because of their compositions. Source: CQG

As the quarterly chart of the price of platinum minus the palladium shows, after garnering a premium of over $700 per ounce from 2005-2013, platinum’s premium has declined to under $50 per ounce recently. It is likely that the ascent of palladium will cause industrial users of the precious metals to turn to platinum which at the current price differential offers both industrial benefits and a more attractive value proposition. If platinum can climb above the $1000 level and challenges the 2017 highs at just under $1050, it could be off to the races for the rare precious metal. Platinum is cheap these days versus both palladium and gold, and a long-term reversion to the mean would suggest that platinum is overdue for a significant rally. Platinum closed last Friday at the $980 per ounce level on the NYMEX October futures contract.

Two other reasons for precious metals to get a lot more precious by the end of the year

Palladium is flashing a bullish signal for the precious metals sector and there are two compelling reasons why the chances of a rally in gold, silver, and platinum are high at this time.

The first reason is that the dollar cannot seem to stage any significant recovery. The dollar index declined from 103.815 in January to lows of 92.39 on August 2. Critical support for the dollar index stands at the May 2016 lows at 91.88. The dollar bounced from the August 2 lows to just over the 94 level, but that turned out to be a dead cat bounce. Source: CQG

As the daily chart of the September dollar index futures contract shows, the attempt at a recovery in the greenback failed miserably. After comments by ECB President Mario Draghi at Jackson Hole, Wyoming on Friday, August 25 the index fell to a new and lower low at 92.345. The dollar index is once again approaching critical support which stands at just less than 0.50 below Friday’s low. A weak dollar tends to be bullish for the prices of precious metals and a breakdown in the U.S. currency could trigger a significant rally over coming weeks.

The second reason to be confident about the prospects for precious metals prices is that the political and economic landscapes on a domestic basis in the United States and international level are both filled with potential landmines for the months ahead. Whether it is the deteriorating relationship with Russia, a nuclear North Korea, Chinese trade issues, Iran and the Middle East, the divisive issues facing the United States, or other problems, periods of fear and uncertainty are likely to impact markets and precious metals will benefit from increased volatility.

Precious metals are all currently at levels where the chances are high for a significant rally. Gold is sitting just below its technical resistance level and highs for 2017. Silver is above its midpoint and always has the potential to move quickly as it is the most volatile metal in the precious metals sector. Platinum has been beaten like a red-headed step child since 2014, and a reversion to the mean which will lift the price of the rare metal is long overdue. Palladium is on its way to potentially challenge its all-time high at $1090. Palladium has been leading the way in the precious metals sector and is a sign that the other metals that trade on the COMEX and NYMEX divisions of the CME are on the verge of following on the upside.

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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.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.

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