| Wednesday, May 28, 2014 | Issue #60 |
Eric Fry, reporting from Laguna Beach, California...
The S&P 500 Index zigzagged slightly higher yesterday - setting a new record high in the process. Unfortunately, most other U.S. stock indexes have not zigged and zagged as successfully as the S&P 500. The Dow Jones Industrial Average has gained a measly 99 points so far this year, while the small cap Russell 2000 Index is still struggling to get out of the red.
In other words, 2014 looks nothing like 2013. By this time last year, all the major U.S. stock market averages had advanced at least 16%... on their way to gaining at least 30% for the year!
Meanwhile, over in the commodity sector, 2014 also looks quite different from 2013... to the delight of resource investors everywhere. By this time last year, most commodity prices were sliding lower, if not completely collapsing. The gold market, for example, was putting the finishing touches on its worst quarterly performance since 1971!
Nevertheless, in the midst of this commodity "death spiral," Sean Brodrick, The Oxford Club's expert on all things commodity-related, urged his readers to invest in palladium.
"Now - now - is palladium's hour to shine," Sean declared in July of last year. "I call palladium the Rodney Dangerfield of metals because it 'gets no respect, I tell ya, no respect at all.' Palladium is mostly an industrial metal, outdazzled by its flashier sisters gold, silver and platinum. While those other metals take frequent trips to the jewelry store, palladium toils away in the auto factory."
Then Sean laid out the bullish case for palladium... and why he thought it was on the verge of gaining a lot more respect. On the supply side of the ledger, Sean explained that production would likely decline in both South Africa and Russia, which together produce about 80% of the world's palladium.
On the demand side, Sean noted that "about 90% of palladium production was used in the automobile industry last year." And he speculated that this source of demand was likely to continue growing.
Considering all these factors, Sean declared, "My target on the metal is $830."
On the day Sean set that price target, palladium was changing hands for $718 an ounce. Today it is trading for $833... exactly as he anticipated.
So that's the end of our little I-told-you-so story, right?
Nope. Sean still likes palladium... and he believes its price will go even higher from here. In today's featured essay, Sean updates and details the bullish case for palladium. He also mentions a couple of specific ways to invest in this increasingly precious metal.
The Rodney Dangerfield of Metals Gets Respect By Sean Brodrick
 | | Ten months ago, I explained why palladium, the "Rodney Dangerfield of Metals," was about to get some respect. Palladium has rallied about 15% since I made that call. But even so, I think its price can go a lot higher from here.
In fact, palladium is "breaking out" to new multiyear highs at this very moment.  Palladium recently jumped to $830 an ounce. Soon, it could challenge its 2011 highs just above $860. And once it gets above that, I think we'll easily see another 10% rally. But how about longer term?
So let's take a look at three factors that are greatly affecting the palladium supply and demand picture.
1. Labor Troubles Aren't Over
One of the forces I mentioned in my original article was labor troubles in South Africa. South Africa produces nearly 40% of the world's palladium.
More than 70,000 mine workers went on strike in South Africa in January. The strikes have dragged on for 17 weeks now. There is no end in sight.
With mine supply of palladium suppressed, stockpiles make up the difference. Those stockpiles bridge the gap for the world's automakers. They use palladium in catalytic converters for gasoline-powered vehicles.
Car companies' palladium usage climbed 3.6% to a record 6.91 million ounces in 2013, according to data from analysts at Johnson Matthey PLC. Meanwhile, global supply fell 0.4%.
Still, it's a manageable gap as long as there aren't new sources of demand for palladium.
But now there IS a new source of demand.
2. ETF Demand for Palladium Ramps Up
Last year, I told you about two funds in North America that hold physical palladium. Those are ETFS Physical Palladium (NYSE: PALL) and Sprott Physical Platinum and Palladium Trust (NYSE: SPPP). Now, two more funds have joined the party. These new funds are based in South Africa.
The reason is simple: South African investors aren't fools. They could see trouble on their doorsteps. They wanted domestic palladium funds. So, Standard Bank's Johannesburg-listed AfricaPalladium ETF and another fund, Absa Capital's New Palladium, launched in March.
These two new funds have taken in a half-million ounces of palladium in less than two months! If that rate of growth continues for the rest of the year, these funds could hold well over a million ounces of the metal.
Meanwhile, higher prices means palladium funds around the world also buy. According to Reuters, total ETF holdings of palladium jumped to 2.27 million ounces on Friday. That's a new record. Remember, only 8.7 million ounces of palladium are mined around the world in a good year. The ETFs are putting tremendous pressure on limited supply.
And let's get back to supply.
3. Russian Bear Has a Lot to Say About Palladium Prices
Russia accounted for about 41% of palladium supply last year. In fact, together, South Africa and Russia provide 80% of the world's palladium. South Africa has its problems. Russia has problems too. Let's start with the sanctions that the U.S. and Europe imposed after Russia took over Crimea, a mostly Russian-speaking part of neighboring Ukraine.
I'm not here to fight the battle over Crimea. I do believe we'll be fighting another Cold War soon. But that's another story. Here's what is important: Russia is chafing under sanctions and striking back at the West any way it can.
One way it can strike back is to stop selling palladium from its stockpiles. Those are the only sizeable palladium stockpiles in the world.
Johnson Matthey doesn't expect ANY sales from Russian state stockpiles this year.
Ouch!
Bottom Line: Look for Higher Prices
It's easy to see the supply and demand squeeze coming. GFMS analysts expect the palladium market to be in a deep deficit this year. They expect a shortfall of somewhere around 1.3 million ounces. And if palladium gets more popular with funds, who knows?
Meanwhile, Johnson Matthey says the palladium deficit will widen to 1.61 million ounces. That would be the biggest shortfall... EVER!  So, could we see 10% upside in palladium? Heck, yeah... maybe a lot more. Bull markets can go on longer and higher than most people believe possible. And palladium is in a bull market now.
So if you're looking for something to buy this summer, consider buying palladium on pullbacks. I like both the ETFS Physical Palladium and the Sprott Physical Platinum and Palladium Trust.
The "Rodney Dangerfield of Metals" is finally gaining the respect it deserves. You will want to be along for the ride.
Good investing,
Sean Brodrick
for Free Market Café | | |
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