Don't Buy The Hype and Palladium Update
The stock market hit a 5 year high yesterday. Across the street from where I work, a Ferrari dealership recently opened up. Throughout America, families are eating out more often, digital cable has become a basic household necessity, and flat screen televisions are flying off the shelves. At first glance, all of these signs point to a robust economy. Consumers are spending money, corporations have record profits, and relative to the other citizens of this world, Americans are living lifestyles of the rich and famous.
As picturesque as the above scenario seems, it is no wonder why your average investor is not buying into the recessionary scenario. The stock market is heading higher, their home prices have appreciated, and the Fed is continually asserting that we have minimal inflation. As a result, investors are content on focusing their current lifestyles while ignoring the much larger global economic picture that is unfolding before their eyes.
In truth, the larger global economic picture does not look good for the overall US economy. Whereas the United States was once a great manufacturing economy, we have now become the greatest debtor nation in the world. Whereas the US dollar was once the safe haven of wealth, it is now be divested from Central Banks around the globe. Whereas the average US consumer had income and savings to continually purchase goods, they are now in debt. There is no question that these major fundamental factors have to be acknowledged. Focusing solely on your immediate lifestyle is hopelessly optimistic and shortsighted.
In his testimony before Congress, Ben Bernanke stated that he will rely heavily on data to determine how the economy is fairing. It is no wonder why your average investor is complacent about the long term outlook for our economy. Bernanke's comment in itself, reaffirmed that he will likely follow in the footsteps of Alan Greenspan. Relying mostly on data is like waiting for your kid's report card to determine if he needs help on his studies. Instead of noticing that he is not doing his homework and often misses class, you decide to take a "wait and see" outlook on the economy. This "wait and see" outlook will seem blissful in the short term, but will add greater damage to the US economy in the long-term. For example, instead of working on ways to combat inflation, Bernanke will spend time touting the overall strength of the US economy and the minimal Core CPI numbers. Until inflation is blatantly obvious and we are in the midst of a recession, he will likely be in denial of the true economic state of affairs.
In the last several months, we have seen a pullback in the commodity markets. As a result, the question of whether we are in a commodity bubble has risen more often. Investors that ask this question do not really understand the reason why we have had a multi year run in the commodity markets. First and foremost, there has never been a time in history where commodity bull markets have lasted less than 15 years. At this rate, we have at least another 10 years to go. Secondly, we are living in unprecedented times. If the average investor would stop and think about what is going on around them, they would likely come to the same conclusion.
Although the US consumer is living beyond their means, one third of the world's population is industrializing. And not only are they industrializing, but they are industrializing at a record pace. With industrialization, comes the need for raw materials and commodities. With industrialization comes the creation of an educated and wealthier working class. With the creation of a wealthier class, comes more discretionary income that will be spent on consumer products and food. This, however, will not happen overnight. But it will happen. You can either jump on the commodity bull market now, or regret that you did not participate in potentially the greatest bull market in history. I am offering a free brochure titled "The Case for Commodities" to anyone who asks. You can request one here.
As many of my clients and newsletter readers know, I have been extremely bullish on Palladium. My bullishness can be summed up by the opening paragraph of a commentary that I wrote seven months ago:
Whenever an asset falls in value by 80%, it has to be examined for its potential as a contrarian, value-oriented investment. Such is the case with Palladium. In a commodity bull market, where substantial run- ups have occurred in oil, copper, precious metals, and other raw materials, palladium has escaped the notice of most investors. Even more interesting, is that the price of palladium has declined in the midst of rising demand. I believe that this trend is about to reverse, as the manufacturing community is taking notice of the substantial spread between the two metals that are similar in their industrial use. (Full Article)
Since I wrote my initial commentary, Palladium has definitely reversed its downward trend. In fact, Palladium has risen 37% in value. Although this move up might not be surprising to some, since precious metals in general have hit multiyear highs, it does represent a reversal in a metal that has lagged behind its precious metals counterparts.
Furthermore, the spread between platinum and palladium has narrowed over the last several months. When I first talked about the spread, Platinum was 4.66 times more expensive than Palladium. Today, Platinum is only 3.28 times more expensive than Palladium. Another way of looking at this is that since my initial recommendation, Palladium has moved up 37% in value, while Platinum has only moved up 10% in value.
In either case, price differentials between these industrially similar metals are still enormous. Take a look at the updated Platinum versus Palladium chart below:
In the intermediate term, I expect Palladium prices to make a quick run towards the 340 level where it will likely encounter strong resistance. In the long term, I expect the demand for Palladium to increase exponentially. It is interesting to note, that from 1996 to 2000, Palladium was the primary metal of choice for autocatalytic convertors. After Palladium prices hit a record high in 2001, the demand for platinum increased. I see this trend reversing in the next several years.