Of all the precious metals of interest to investors,
palladium may be the one to watch going into the second half of
Palladiums supply and demand fundamentals are bullish
for the metals price, with a widely predicted supply
deficit starting this year and deepening by next. Meanwhile,
demand is rising.
Still, you would never have guessed that based on its recent
performance. Currently, the price isnt far off its lows.
The problem to date is that in a risk on
environment, palladium, which is used largely in automobile
catalytic converters, has been getting shorted aggressively,
especially by the hedge funds, says Wiktor Bielski, the
London-based global head of commodities research at VTB
Capital, the Russian investment bank. To understand why
palladium has traded down despite the strength in the auto
market, you have to keep an eye on the long versus short
statistics released every Friday by the U.S. Commodity Futures
Trading Commission, Bielski says, noting that all of the
industrial metals are trading like risk assets right now. With
palladium, I have to say that anybody playing the short
side has done very well, he says. But, Bielski insists,
you cant fight the fundamentals forever.
After hitting a year-to-date high of 71.51 on February 22,
ETFS Physical Palladium Shares (PALL), the only U.S.-listed ETF
backed by physical palladium, closed on July 9 at 57.48, a
decline of 19.6 percent. At this level, PALL isnt far
from its 52-week low of 52.90, and its well off its
52-week high of 83.90.
Is there a lot of mileage left in shorting palladium?
Probably not, says Bielski. The risk/reward
is clearly skewed more to the upside. He predicts that as
a result of the way palladium has been beaten down by the
shorts, the stronger and more sustained the rally will be
when it comes. Just when that will occur, he says,
is just impossible to predict at this point, unless you
have a line into Ms. Merkel and the euro zone
One of the leading reasons why a number of fundamental
commodity analysts like Bielski are strongly positive on
palladium is that Russia has announced that 2012 will be the
last year for sales from its Cold Warera stockpiles. Back
then, Russia was mining nickel aggressively to build military
equipment, and it ended up with lots of palladium as a
by-product. Up until now, Russia has been the second-largest
producer of palladium (behind South Africa), with over 46
percent of global annual production, according to research from
ETF Securities of London, PALLs sponsor.