08-24-2017: December Palladium: Supply/Demand Deficit Continues for Sixth Straight Year

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Introduction
Intermarket
Parabolic

Nirvana
News
Point & Figure
Cyclic/Seasonal

Internal Progrm
Third System
Margin

Historic Range
Commitment
Volatility

Random Chart
Options
Calend Spread

Level Table
Other Factors
Recommendation

2

3     5
64
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Introduction

We generally "max out" risk on any one trade by restricting margin requirement to below $15,000 per contract. Palladium violates this just slightly, but it is very volatile and the best commodity performer so far this year. There has been a continual supply deficit with demand using up stockpiles for several years. The chief source of demand is the automotive catalytic converter industry. How well new cars are selling has a lot to do with platinum group metals prices, and there is some sign that auto sales are beginning to fall off. Nonetheless, the time and degree for this to take effect seems to have little effect on stopping the rise in palladium even to where it may surpass platinum in cost. The ability to shift back and forth in industrial use from one metal to the other might suggest an approaching parity relationship in price. This is one of the rare situations where our ultimate conclusion does not agree with "Other Factors" in the Decision Matrix. Our system is trying to warn us that corners on a particular metals market do not allow prices to rise forever.


Intermarket Analysis

We fed Palladium, Platinum and Gold into a neural network to get the following result:




Parabolic Chart

December Palladium:

Parabolic Chart


Nirvana Chart

December Palladium:

Initial Chart


News Analysis

The two main U.S. and European palladium exchange traded funds have hemorrhanged from 3.1 million ounces in 2014 to 1.6 million ounces today. That is while palladium has risen 38% so far this year to its highest price since 2001. That's more than 16 years. For funds that hold exotic assets like palladium, quirks in the underlying market can lead to unpredictable patterns. The amount of actual palladium held by ETF's is as low as 60% in terms of holdings, with investor capital supplying the rest of assets, implying a scarcity of the actual metal. ETF's are now acquiring more of the actual metal. Clearly there is high demand and limited availability of palladium. The automotive industry is the biggest buyer of the metal, and demand from there has climbed 4% so far this year. This accounts in total for about 80% of the demand for palladium and 40% of the demand for platinum. Increased tightening emission legislation in Europe and China for SUV vehicles and a UK ban on diesel engines has boosted demand. Russian nickel and palladium producer Norsk said conumption of palladium will reach an all-time high of 10.8 million ounces this year.

With falling prices for battery packs from $1,000 per kwh in 2010 to close to $100 today have increased popularity of electric vehicles. As market share of gasoline and diesel powered vehicles declines, so will the demand for palladium. The implication is that demand for lithium used in batteries will soar at the expense of platinum group metals. Platinum and palladium are used in fuel cell technology, but it appears this is not developing fast enough to be a factor.

A weak Dollar and hesitation by the U.S. Fed to further increase interest rates has given a lift to precious metals. Diverging views in the Federal Reserve Open Market Committee (FOMC) are likely to push back rate-hike expectations.

Supply of palladium will lag demand for the sixth straight year. It's now almost as expensive as platinum for the first time since 2001, helped by Volkswagen AG's emission scandal two years ago that has prompted customers to switch from diesel to gasoline cars. Many analysts including those at Noah Capital Markets Pty Ltd. in Johannesburg believe palladium prices could easily overtake platinum near-term. Mine production hasn't been able to keep since 2012. Rising car sales and stricter emission limits are the main reasons. Stockpiled metal helpled feed consumer demand in recent years, but that source may now be running out. The use of the two meals platinum and palladium can be used interchangeably in catalytic converters, which could prompt a switch in demand from palladium to platinum.

In good times, industrial metals such as palladium should outperform gold. Some analysts are suggesting that investors looking for safe havens should replace gold and silver holdings with platinum group metals which are expected to outperform. Better safety might be had by allocating investments between gold and the other metals.

Diesel vehicles produce much nitrogen dioxide, the main cause of smog, which is why Paris and London are implementing measures against diesel vehicles.

In our previous review of palladium, the main news was that U.S. relaxation of proposed emission standards placed China ahead of the U.S. ina strength of standards and it was expected demand from China would be especially critical.

Palladium prices have now gained 45% year on year making palladium one of the, if not the, strongest performing commodity of late. North American Palladium traded on the Toronto stock exchange returned to profitability in the second quarter of 2017 on higher palladium production and improved prices. The comany signed an agreement with Impala Platinum and Transition metals earlier this summer and will begin exploration drilling at is Sunday Lake project in Ontario.

There are some reports of slowing growth in automotive markets in both the U.S. and China this year, which could eventually limit increases in palladium price. In particular, Commerzbank analysts say that the Chinese automotive marekt is faltering. Vehicle sales have fallen 0.1% year on year and 2.2% in April while U.S. auto sales fell 2.9% in May. 17.2 million new vehicles will sell in the U.S. in 2017 versus 17.55 million in 2016 according to LMC Automotive predictions.

A Johnson Matthey report indicated that palladium demand in 2017 will be at 7,423,000 ounces, up from 6,025,000 ounces in 2016. But the same report indicates that platinum will be expected to go into surplus this year. That will help push palladium prices over those of platinum. A lot of survey work in the largest undeveloped primary platinum group metals resource in Canada is going on in Northwest Ontario. Firms involved incluide New Age Metals and North American Palladium.


Point & Figure Chart

920.0I                                                                  R  8/22
     I NYM - Dec-17 Palladium, 100 troy oz., $/oz. Cm.=0.30  Lim.=30.0
     I                                                                   X
     I                                                                   X
     I                                                                   X
880.0I_________________________________________________________________X_X_____
     I                                                                 XOX
     I                                                           X X   XOX
     I                                                           XOXO  XO
     I                                                           XOXOX X
840.0I___________________________________________________________XO_OXOX_______
     I                                                           X  OXOX
     I                                                           X  OXO
     I                                                           X  O
     I   X                                                       X
800.0I_X_XO____________________________________________________X_X_____________
     I XOXO                                                  X XOX
     IOXOXO                                                  XOXOX
     IO OXO    X                                             XOXOX
     I  OXOX X XO                                        X X XOXOX
760.0I__OXOXOXOXO________________________________________XOXOXO_OX_____________
     I  OXOXOXOXO                                    X   XOXOX  OX
     I  OXO OXO O                                    XO  XOXOX  OX
     I  O   OX  O                                    XO  XOXOX  O
     I      OX  O                              X     XOX XOXO
720.0I______OX__O______________________________XO____XOXOXOX___________________
     I      O   O                              XO    XOXOXOX
     I          O            X               X XO  X XO OXO
     I          O            XO              XOXO  XOX  OX
     I          O            XO              XOXOX XOX  OX
680.0I__________OX___________XO______________XO_OXOXOX__OX_____________________
     I          OXO          XO              X  OXOXOX  OX
     I          OXO          XO              X  OXOXOX  OX
     I          O O        X XO              X  OXOXOX  OX
     I            OX       XOXO              X  O O OX  O
640.0I____________OXO______XOXO______________X______OX_________________________
     I            OXO      XO O              X      OX
     I            O O      X  O              X      OX
     I              OX     X  O        X     X      OX
     I              OXOX   X  O        XO    X      O
600.0I______________OXOXO__X__O________XO____X_________________________________
     I              O OXO  X  O        XOX   X
     I                O OX X  O      X XOXO  X
     I                  OXOX  O      XOXOXO  X
     I                  OXOX  O      XOXO O  X
560.0I__________________OXO___O______XOX__O__X_________________________________
     I                  OX    O  X   XOX  OX X
     I                  OX    OX XO  XOX  OXOX
     I                  OX    OXOXO  XOX  OXOX
     I                  OX    OXOXO  XO   OXO
520.0I__________________OX____O_O_O__X____O____________________________________
     I                  O         OX X
     I                            OXOX
     I                            OXOX
     I                            OXOX
480.0I____________________________OXOX_________________________________________
     I                            OXO
     I                            OX
     I                            OX
     I                            O
440.0I----I----I----I----I----I----I----I----I----I----I----I----I----I----I---
      1                      11111                  11111
      21113334456777778888999001121123345556668889990122211133445566677788
      31121120100001120112012012200110210110120110010000102301120212212201
      13401876453163633287259130545381853186449016995729535136864642620770
Our computer tells us that a non-conventional reactive interpretation of P&F signals works best for Palladium. Therefore the above chart is taken as giving a sell signal.


Cyclical and Seasonal Factors

We are headed toward a cyclical low and a seasonal down period.

Cyclicals Cyclicals Seasonals
Seasonals


Internal Program

Our best-performing internal program is "Pattern." It is giving a sell signal.

Internal Printout 1 Internal Printout 2

Results of "Pattern" for Palladium (blue lines = successful trades, red, unsuccessful): (Always in the market.)

Results


Third System Confirmation

Our third system has triggered a sell signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


Margin

The point value is $100. Initial margin on a single contract is $15,973.
Use of options is not advised unless you can find a broker that trades them.
Use calendar spreads instead to reduce risk.
This is definitely NOT a recommendation or a referral, but R.J. O'Brien or ClearTrade may offer palladium options through the Weboe trading platform.


Historic Range

Scale trade sellers are entering the market for the long term in this price range.

Historical Chart


Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Large speculators with the best track record are getting increasingly-short.

Commitment 2

Interpretation of a Different Site Below (Their trader categories vary from ours):

Commitment 3


Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that a change in major trend to down is imminent at a volatility low point.

Range/Volatilitiy Chart


Possible Future Prices

Random Chart


Option Recommendation

If you can find a broker that allows you to trade palladium options (which may be difficult)...
Our option trade recommendation is to Buy (1) Palladium March 835 Put and Sell (1) Palladium December 870 Put @ 3.10 to the buy side or less.
However, this has to be qualified by the fact that without bid/asks or a market in our recommendations, you may have to hold the option spread until expiration.
The problem with that is the chart below plainly shows there is a limited window to offset position which would be profitable, and one needs to offset within that window of time.
Therefore, we suggest you forget about palladium options and perhaps use a calendar spread to limit risk in that fashion.


o 1 o 2 o 3 o 4 o 5


Calendar Spread

What the Dec. - Jun. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go down in the long run. There is frequent backwardization in the contracts which confuses the issue a bit. The best time to enter or leave the above spread is when it is at -1.00 or narrower selling the far as prices are falling and then buying the near, and exiting or entering when it is at +15.00 or wider buying the far as prices are rising and then selling the near. At this time, we appear to be midway, possibly approaching the sell the near, buy the far point.





Level Table:

Level Table

The path of least resistance is up.
950.0|                                                                 R  8/22
 NYM - Dec-17 Palladium, 100 troy oz., $/oz. Cm.=0.30  Lim.=30.0
     |
     |[
     |Z[   <<<
900.0|ZZ[______________________________________________________________________
     |Z
     |YZZZ
     |YYYYZZZZZZ
     |VVWYYYYYZZ
850.0|VVVVWYYZ_________________________________________________________________
     |VVVVVVVVVWWWWXXXXXXYY
     |UUVVVWWWWXXXXXYY
     |UUUUVWWWWXXXY
     |UUUWWWX
800.0|SSUU_____________________________________________________________________
     |PQSSSSSSTUU
     |PPPQQQQQQRRRRSSSSSTTTTU
     |LLLNNPPPPQQQQQQRRRRRRRSSSSTTTTU
     |LLLLMMNNNNNNNPPPRRTU
750.0|GHLLLLMMMMMMNNNNNNNNOOOOOOPPPRRRTTU______________________________________
     |GGHKKKKLLMMMMMNNOOOPPPTTTTU
     |GHHHKKKKLLLLLMMMOOOPT
     |GGGGHHHHHKKKLLLLLLMMOOP
     |GGGGGHHHHHHHHKKLLLL
700.0|CCCGGGHHHHJKLL___________________________________________________________
     |BCCCCGGGJKKL
     |AAAABCCCCCCDFGJJK
     |AAAAAABBBBBCCCDFFFFGJJK
     |AAAABBBCDDFFFFJJKK
650.0|AAABBDDDDFFFJJJJK________________________________________________________
     |ABBBBDFFJJJJ
     |DDDDFF
     |DDDDEEEEF
     |EEEEFFFF
600.0|EEEEEEFFF________________________________________________________________
     |
     |
     |
     |
550.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO= 0.057
             1 1 1 1 1 1 1                                            
       8 9 9 0 0 1 1 2 2 2 1 1 2 3 3 3 4 4 5 5 6 6 7 7 8 8           8
       2 0 2 0 1 0 1 0 1 3 1 3 1 0 1 2 1 2 1 2 0 2 1 2 0 2           2
       4 7 1 5 9 2 6 1 5 0 7 1 4 1 5 9 2 7 1 5 9 3 0 4 7 1           2


Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary


Here's an intraday chart for a previous day ( 3/24 ).

Intraday Chart


                 Risk Versus Opportunity Report
                ________________________________

                   PAZ7    December Palladium

                      High Price:  953
                   Current Price:  925
                       Low Price:  870

                            Risk: -0.061
                     Opportunity: -0.121

                    (O/R) Ratio =  1.964


Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis + 1
Parabolic Chart + 1
Nirvana Chart + 1
News + 1
Point & Figure - 1
Cyclicals - 1
Seasonals - 1
Internal System 1 - 1
Internal System 2 0
Third System - 1
Historic Range - 1
Commitment of Traders - 1
Range/Volatility - 1
Level Table + 1
Other Factors + 1
Total - 2
Place 1 December Palladium on a Sell Watch with stoploss @ +40.00 above the get-in point when recent price is represented as "925.60".
____________________________________________________________________________________________________________________________________________G.S.