Platinum & Palladium

Ready to Rumble

Abstract

The summer doldrums are almost upon us, when the markets supposedly quite down for a vacation of sorts - go away in May and come back in September some say. There is some validity to this adage, but never say never.

On the short term front it looks like the precious metals are rallying, and may have further to go. On an intermediate term basis it appears that more consolidation is needed - backing and filling and building a stronger base from which to launch the next move up.

The lows for this intermediate term correction may not yet be in place; in the least it appears that the lows will be tested one more time; whether they hold or not remains to be seen.

Platinum and palladium have been rallying along with gold and silver. All four precious metals have seen recent upside action.

There are a few stocks associated with platinum and palladium that are beginning to get my attention. This is not a recommendation to run out and buy them tomorrow, it is simply an observation coupled with what I am doing in my own portfolio. Caveat Emptor.

Platinum

Platinum is the most "expensive" of the precious metals, sporting a price twice as high as gold's. This means that weight for weight - platinum is presently valued twice as much as gold.

Catalytic converters in the auto industry require platinum and palladium in their manufacturing, although silver can be used as well. Platinum is a rare metal, and its demand is greater than its supply, which is one of the reasons it has been going up in price - there are others as well. Most platinum is mined in South Africa, but not all.

Due to the electric power shortages in SA, production of platinum has slowed up considerably. This in turn puts upward pressure on prices. Another result of the SA power shortage is that platinum mined outside of Africa has become dearer.

Below is the daily chart for platinum futures. It shows that a series of higher lows have so far been kept intact. Price is holding above its 50 day moving average.

MACD has put in a positive cross over and the histograms are turning positive. ROC has moved above zero, however, it has turned flat and needs to turn back up.

RSI has moved up over the 50 level, but has just recently turned down. It too needs to turn back up before a sustainable rally can occur. The weight of the evidence is bullish, but further confirmation is needed.

Palladium

Palladium, along with platinum, rhodium, ruthenium, iridium and osmium form a group of elements referred to as the platinum group metals (PGMs).

Over half of the supply of palladium and platinum goes into catalytic converters, which convert the dangerous gases from auto exhaust into less harmful substances.

Palladium is also used in medicine, groundwater treatment, and fuel cells, as well as many other industrial uses. It is also used in making jewelry. The chart below shows the projected rising demand for palladium, with supply not keeping up.

Palladium Supply/Demand

Next up is the daily chart for palladium. It shows price well above its 50 day moving average and bumping up into overhead resistance.

If price can break above the horizontal trend line and hold - resistance will become support, a very bullish development if it occurs.

A positive MACD cross has occurred and ROC is moving up strongly. RSI has rocketed up and is now touching overbought territory. Caveat Emptor.

Now that we have looked at the charts of platinum and palladium, let's take a look at a couple of companies that are in special situations that may allow them to reap large profits from the SA power supply problem.

Both of these companies mine outside of SA - Stillwater Mining (SWC) operates in Montana, and North American Palladium (PAL) is headquartered in Canada.

Any further power problems or strikes or other problems in SA could have a huge positive effect on both of these companies bottom line. I hold positions in both of these stocks - new purchases were made last week.

Stillwater Mining (SWC)

Palladium is a precious metal, one of the platinum group metals (PGM), which typically are found together in ore deposits. There is only one primary palladium producer in the U.S. - Stillwater Mining Company.

Stillwater runs two mines in southern Montana. The J-M Reef is the richest known palladium deposit being mined anywhere in the world, with high grade ore containing a palladium: platinum ratio of just over 3:1.

The weekly chart that goes back to 2003 shows past buying opportunities, and suggests that one may be forthcoming.

North American Palladium (PAL)

North American Palladium Ltd. is one of the largest producers of palladium in North America. It produces approximately 5% of all annual world palladium supply.

Recently PAL entered into a joint venture with Gold Fields in the Arctic Platinum Project in Finland, which is believed to contain one of the largest PGM's deposits in the world.

PAL Metal Production Percentages

Another joint venture with Vale Inco in Canada is underway as well. North American Palladium is in a unique position to take advantage of any power shortages and resulting declines of PGM production in South Africa.

First up is the daily chart of North American Palladium. It shows price attempting to close over its 50 day moving average, which would be a bullish development.

MACD, ROC, and the histograms have all turned up in positive territory, but need follow through action and confirmation to the upside.

RSI has moved up over the 50 level, but has now rolled over just below. RSI will have to turn and move back up for any sustainable rally to occur.

The weekly chart below shows prices going back to 2003. The vertical lines connect several different indicators that were present at the intermediate to long term lows for each phase up in the bull market.

Presently, the same type of set-up is beginning to appear to be under construction on the chart. Notice that price has not gone to the same oversold conditions as on previous bottoms, hinting there may still be some more downside probing coming.

Summary

The fundamentals for both metals and stocks look promising, but in the mining business things can change quite quickly and violently, as was seen with SA stocks.

The charts look pretty good, but once again - with the precious metals things can change in a flash - either up or down. PM stocks are not for the faint of heart.

I have owned both stocks during the bull market and traded in and out of them a few times. Last week I began slowly accumulating a new position, just dipping in to test the waters.

Long term both stocks should do well; it is the short term that is still in question and up in the air.

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