Whilst other precious metals have been benefitting from the recent US Dollar weakness and dovish comments from the US Federal Reserve regarding interest rate hikes, Palladium has declined. Despite a brief rally in February, Palladium's now fallen nearly 6.5% from the start of the year.
Palladium has faced stiff headwinds from some investors taking advantage of palladiums outperformance of other precious metals over the last two years and selling out of ETFs. Palladium's gains for 2014 were into double digits and the popular investment vehicles saw outflows of more hn 50,000 ounces over the last two weeks.
Adding to speculation on Palladium, Norilsk Nickel, the world's largest producer of nickel and palladium announced they're proposal purchase of $2 billion worth of palladium from the Russian Central Bank's palladium inventories, which is estimated to be equivalent to 2.2-2.5 million ounces of palladium. The bank has agreed in principle to the proposal but it remains unclear if Norilsk would sell this palladium into the market as demand requires, or exert some discipline to support palladium prices. Markets seem to have reacted to the news as negative in the immediate short term, adding to last weeks price decline.
But investors sometimes overlook the larger picture of an investment vehicle and have a knee jerk reaction to sudden volatility. Palladium arguably has the best underlying fundamentals of the major precious metals.
Palladium has entered the eighth year of an annual shortfall at 1.6 million ounces. There are market wide concerns over security of supply from major producers Russia and South Africa (a significant reason as to why Norlisk Nickel was keen to secure stocks for its customers), while demand for the autocatalyst mental from carmarkers in the US, China and the emerging markets is expected to hold firm.
Lets analyse the technicals to put Palladium's price action in perspective:
On the weekly charts, I’ve used Bollinger Bands to illustrate the price activity. Bollinger Bands [B-Bands] are generally used to determine overbought and oversold zones, to confirm divergences between prices and other technical indicators, and to project price targets. The Bollinger Bands show price bouncing up and down between the upper and lower bands and price now looks headed for the lower band and I favour support to come in there again [right circled area].
Since the end of last year, there has been a pattern of higher highs and higher lows suggesting a bull trend. I am looking for this current move down to put in another low before the uptrend really gets goings.
One possibility is the coming low makes a bullish double bottom with the trend. That would involve a low around the October 2014 low [left circled area] at $729/oz and rally from here.
Breaking down below the October2014 low, denoted by the horizontal line, would likely mean the bull trend is over but this scenario looks unlikely from the technical indicators.
Relative Strength Indicator (RSI) and Moving Average Convergence Divergence (MACD), are both showing a pattern of higher highs and higher lows, and currently signal oversold, combined with the low B-Bands suggests prices will shortly launch higher again.
Summing up, outflows from ETFs as investors profit take and concern over the Norilsk deal have contributed to Palladiums short term decline, but the long term fundamentals for this year remain very strong. The technical outlook indicates Palladium is very oversold and is at or near to a market low. A rally from current price range is a strong possibility which makes Palladium a very attractive opportunity at this time.
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