From Taylor Dart
- Despite a 17% rally in gold since March, palladium is trading 10% lower.
- Palladium is coming down to test its 40-week moving average for the second time in three months, generally a sign of weakness when tests become more prevalent.
- I believe investors should stick with the strongest metal which is gold, and avoid the weakest one, palladium, which looks like it may have topped.
Palladium (PALL) was the most talked-about metal last year as it soared 20%, producing one of the most robust returns of any asset class in a dismal year for most markets. This significant outperformance came on the back of gold (GLD) and silver (SLV) being down for the year, and showed extreme relative strength in palladium. This made palladium an asset worth owning as we entered 2019 as the metal was somehow managing to climb despite any help from its brothers in the metal complex. Since that time, however, we’ve seen a significant divergence. While gold blasted to a new 6-year high and is now up 10% past that breakout level, palladium is actually down 10% over the same period and has not managed to make a new high vs. its March high. The massive outperformance in palladium has turned into relative weakness, and this suggests that there is a minimal benefit to owning palladium in here. I believe if gold were to pull back from current overbought levels, there is a good chance that palladium will get hit the hardest among the metals complex. For this reason, I see palladium as an avoid here.
For those who feel they have missed this metals bull market, palladium might be looking like an attractive entry here. The metal is part of the metals complex, yet has not risen anywhere near as much as gold has. This under-performance may seem like the metal is due to play some catch-up. While this is nothing wrong with this thinking from a common-sense standpoint, common sense rarely pays in the market. The real metals trade is to be long gold for a new potential rate-cutting cycle as Powell tries to stave off a recession and reel in any weakness from Trump’s fuel he keeps throwing on a trade war front. An investor would be much wiser to own the strongest metal that is making new highs continuously, which is gold, not the laggard, palladium.
Bullish sentiment for gold has spent the last four trading days above the 95% level, which is the first time this has happened since early June of 2010. While gold traded higher by 1% over the next two weeks, it then fell 9% in a six-week violent skid. Even if we were to see half of the correction we saw in June 2010 from similar sentiment levels, palladium has a good shot at breaking its 40-week moving average which has now been tested twice in the past three months. When a commodity sees a massive move and begins to check its vital moving averages more frequently, this is often a sign of stalling action. After a nearly 100% advance since its 2018 low, stalling action and significant relative weakness is a serious red flag for the metal. I believe that traders should avoid platinum here as a catch-up trade, and instead ready themselves to buy any 5% or larger dips in gold down to the $1,400 – $1,440/oz level.
(Source: Daily Sentiment Index Data, www.trade-futures.com)
For my own work, the two strongest precious metals are gold and silver, and the two weakest is palladium. For those looking to play this move, they should be looking to buy sharp dips of 5% or larger in gold and silver as a correction is more than overdue, and avoid palladium at all costs. The low asset that has yet to perform can often seem attractive as it looks oversold, but anything that’s staying oversold in a precious metals bull market has no place in one’s portfolio. I will be looking to buy dips in gold to the $1,440/oz range if we get them, and may look to short palladium over the next month if the right setup arises.
The Aberdeen Standard Physical Palladium Shares ETF (PALL) was trading at $135.15 per share on Thursday morning, up $1.55 (+1.16%). Year-to-date, PALL has gained 33.09%, versus a 9.90% rise in the benchmark S&P 500 index during the same period.
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About the Author: Taylor Dart
Taylor Dart has over 10 years of experience in active & passive investing specializing in mid-cap growth stocks, as well as the precious metals sector. He has been writing on Seeking Alpha for four years, and managing his own portfolios since 2008. His main focus is on growth stocks outperforming the market and their peers. In addition to looking at the fundamentals, he uses different timing models for industry groups, and scans upwards of 2000 stocks daily to identify the best fundamental opportunities with the timeliest technical setups. Taylor is a huge proponent of Trend Following and the “Turtles” who enjoyed compound annual growth rates of over 50 percent per year..