Are Investors Getting Ahead Of Themselves Investing In The Palladium ETF?

Call me a worrywart, but palladium’s got me fretting. Platinum’s poorer relation has boomed since December 2008, when spot prices bottomed at $160 an ounce. But earlier this month, palladium’s parabolic rally stalled at $480.

That’s what’s got me worried. Not the stall—it’s all about the word “parabolic.” Really, there’s no other way to describe the arc scribed by palladium prices. They climbed relentlessly, hardly taking a breath, as the market recouped more than two-thirds the losses taken in 2008. Between March and December of that year, palladium plummeted by $440 an ounce.

So, one thing’s for certain: Palladium prices are volatile.

And that volatility is the other thing that worries me about the metal, especially when you consider how thin the palladium market is. It’s very thin. NYMEX open interest averages less than 23,000 contracts. You could bowl this market over with a four-pound ball.

Yeah, I know all about palladium’s use in catalytic converters. I know, too, how much demand the recently introduced ETFS Physical Palladium Shares (NYSE Arca: PALL) created for the metal. But markets run on expectations, and this market’s sending signals that it expects lower prices.

Let’s look at PALL, for example. As a proxy for palladium prices, PALL is very much news-driven. Capital flows into the shares peaked earlier this month, when positive auto sales numbers goosed investor hopes about industrial recovery. But buying interest has since faded, as investors await fresh signals:

PALL Money Flow Index (MFI)

PALL Money Flow Index (MFI)

More important is the waning interest in palladium by money managers. Since the top of the year, the net long position in palladium futures held by funds has slumped nearly 12 percent, while overall open interest has been cut back by 5 percent. Rising prices accompanied by falling interest bespeaks weakening in a market.

Now, what about those prices? Well, there’s a pretty healthy offer at the $480 level, which was a resistance area between April and June 2008. That represents some overhanging supply left over from the market’s run-up to the $600 level earlier that year.

NYMEX Palladium (Mar. ’10)

NYMEX Palladium (Mar. ’10)

But more worrisome is palladium’s price trajectory. It’s fast. Awfully fast. As happy a development as that may be for someone who’s long, it makes for a dangerous entry portal for new investors. If you look at the 12-week and 50-week exponential moving averages (these weigh recent prices more heavily than older prices), you’ll note the ratio of the shorter-term average to the longer average is now 1.24. Major tops in 2008 and 2004 were signaled when the ratio peaked at 1.16. It seems palladium has overextended itself.

Does this mean the party’s over for palladium investors? Not necessarily. But it ought to be a warning sign for incoming investors that they should wait for a better entry point. Perhaps, too, it might serve as a reminder for existing longs to follow the money manager lead and take some money off the table.

Written By Brad Zigler From Hard Assets Investor

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