Palladium, Platinum, Gold and Electricity

By: Sol Palha | Sat, Feb 23, 2008
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"If you see the bandwagon... you've missed it." ~ James Phillips

The price differential between Palladium and Platinum has now reached historic proportions; if one goes back all the way to 1977 the price differential between the two metals was never more than 550. Today the price differential is over 1300 dollars; Palladium is trading at roughly 420 and Platinum is trading at roughly 1800 dollars. It is more than double that of the prior price differential which stood roughly at 550 dollars. Just this one fact alone is enough to suggest that Palladium is going to go ballistic. Before we carry on remember this good deals do not present themselves everyday and they take time to become good for if everyone realised they were good no one would be able to make a killing. Good deals depend on mass stupidity and mass impatience; this was clearly seen in the dot.com bust, the housing mania, the Gold, silver bull (both took a long time to manifest themselves), base metals, the silent palladium bull, the agricultural commodities and so forth. We got our subscribers into Silver, gold and Palladium bullion early and initially it looked like we might have done the wrong thing for prices pulled back and then did nothing for almost a year. Fast forward now and look how well patience was rewarded. First entry for Palladium bullion was in the 180 ranges and the second was in the 330 ranges.

The second massive anomaly is the fact that Gold is selling for more than Palladium when in fact Palladium is the rarer and thus essentially more valuable of the two metals. Now we have what amounts to a double intra market positive divergence signal; these signals are very rare and so we hardly speak of them. Basically when you get such a signal it indicates that one of the markets is oversold relative to the other to such a point that in most cases it's a result of massive manipulation. This manipulation always comes to an end and when it does the resulting move is huge to say the least. We also have several massive positive divergence signals and so when one adds all these factors its all but a given that Palladium must and will have its day in the sun.

With the advent of the 2500 dollar car from India and a whole plethora of sub 3000 cars which are on the drawing boards of almost all major car manufacturers, palladium is going to be the top metal of choice to use in Catalytic converters. If you have to cut costs down to the last penny are you going to pay 1800 dollars an ounce for platinum or 420 an ounce for Palladium?

Next one of world's largest Platinum and gold producers are having issues with electricity generation; the country is none other than South Africa. Last Friday according to the Wall Street Journal Anglo Platinum, Impala Platinum holdings and Lonmin PLC had to halt some or all of their production activities due to severe power shortages in the country. Eskom holdings, which generate 95% of South Africa's power, told miners that it couldn't guarantee power supply as a result of an "unprecedented level of imbalance". Expert's state that Platinum production may have peaked in 2006 due to power issues and it could be while before this industry gets to these old levels again. Now we have an additional force pushing Palladium up; potential Platinum bottle necks due to lack of electricity. This is how the element of fear starts to get traction. Electricity generation is not something that can be solved overnight. On a separate note this once again illustrates the power full bull in uranium that is just waiting to resume its upward trend. Nation after nation is going to desperately jump on the nuclear band wagon and they will do so as always right towards the end. Uranium is another long term investment that needs both patience and discipline; prices will soar just as fast as they corrected and they will soar to heights that will one day be looked as unbelievable.

South Africa is not the only country experiencing power issues; China is notorious on this front. Industries are constantly fighting for power and have to deal with rolling black outs; in some areas production is timed to certain hours of the day because that's all they have to work with. Chalco the world's second Largest Aluminium maker (based in China) stated that two of its smelters in South Western China had to be closed this week as a result of power shortages. The copper industry in Zambia is only experiencing power problems and the situation is only going to get worse. All these nations rich in commodities raced to increase production of their natural resources but none of them paid attention to the fact that all this increased activity is based on electricity. There is a very serious possibility that many nations will be prevented from increasing production due to power issues and this will have a further upward driving force on commodities.

Palladium stands out like a sore thumb because unlike the rest it has not been in a rampant bull market and now the reasons for a massive spike have just doubled.

If you look at these two charts you can see clearly see that until now the price differential was never more than 550 dollars.

One can see the fortress of resistance the 360-420 zones have presented to Palladium in the last few years. The final layer to break past now is 420, as the 360 price point has been taken out nicely. We believe the momentum will pick up when 420 is taken out for 27-30 days in a row. It's possible that Palladium could trade all the way to 540 before experiencing a meaningful correction.

Platinum has been going through step channel formation and so far this formation has held for 9 years (ignore the price swing to 2400; Prophets Data appears to be wrong and it will be adjusted later on). Platinum looks like it could trade all the way to 2100-2400 mark before pulling back hard.

Palladium surged past 420 with ease on Monday and even though it dipped below 420 on an intraday basis on Tuesday it still managed to close above this level. As stated above it needs to trade above this zone for between 27-30 days; the longer the better. With rolling blackouts now hitting South Africa and with demand for Palladium increasing due to the roll out of the sub 3000 dollar cars we have conditions that could user in a very rapid price move.

Additional comments Feb 23, 2007

Since initially writing this article Palladium has indeed skyrocketed. There are many reasons for this but the primary reason now is that speculators have jumped in as they hope that Palladium will follow in Platinum's footsteps. We have been advising our subscribers for quite sometime now that the price discrepancy between the two metals could not last forever; the price differential is now at an extreme point. When you couple this with the electricity problems South Africa is experiencing it provides almost the perfect scenario to usher in higher prices for the foreseeable future. Platinum production, gold production and the production of various other metals will now be capped IN South Africa because there is simply not enough electricity to support new growth. The advent of the 2,500 dollar car by India's TATA motors has already pushed automotive manufacturers to look into Palladium as an alternative to platinum for use in catalytic converters; add in South Africa's energy issues and you have a very combustible situation at hand. For the record Anglo Platinum Limited (based in South Africa) is the worlds largest producer of Platinum; it alone account for roughly 38% of the world's production. As the energy issues in South Africa are going to take years to resolve this lost demand has to be made up elsewhere and ramping up production is not something that can be achieved over night. The only other option is to look for alternatives and in this case Palladium is a perfect alternative to Platinum. Now the ride up is not going to be one straight line; in a few short weeks palladium is up a whopping 45%. We expect Palladium to trade significantly higher; along the way up we expect several serious corrections and thus knowledge of these markets is essential if you plan on profiting from this ride up. In the metals markets there are only two metals right now that make sense to play and one of them is Palladium.

Interestingly enough there is almost no resistance after 450; the fact that palladium took out 450 so easily suggests that it could essentially trade up all the way to 630 before pulling back. How fast it gets there will off course depend on how many people decide to jump in. Speculators are busy jumping into the futures markets and speculators are notorious for pushing markets to extreme points before bailing out. As always never over allocate money to any given market no matter how good that market looks, to do so would be to go against all the common sense rules of money management. There are also several stocks one could jump into though most of them have moved up and the best time to get into them now would be on a pull back. In the end one must always buy when others are dreaming of buying and sell when others are dying to buy.

Extracted in part From the Feb 6 2007 Market update.

"Architect. One who drafts a plan of your house, and plans a draft of your money." ~ Ambrose Bierce 1842-1914, American Author, Editor, Journalist, "The Devil's Dictionary"

 


 

Sol Palha

Author: Sol Palha

Sol Palha
TacticalInvestor.com

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.

The information contained herein is deemed reliable but no guarantee is made about its completeness or accuracy. The reader accepts this information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Any statements non-factual in nature constitute only current opinions, which are subject to change. The author/publisher may or may not have a position in the securities and/or options relating thereto, & may make purchases and/or sales of these securities relating thereto from time to time in the open market or otherwise. Neither the information, nor opinions expressed, shall be construed as a solicitation to buy or sell any stock, futures or options contract mentioned herein. The author/publisher of this letter is not a qualified financial advisor & is not acting as such in this publication. Investors are urged to obtain the advice of a qualified financial & investment advisor before entering any financial transaction.

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