Palladium And Platinum
It is by attempting to reach the top in a single leap
that so much misery is produced in the world.
William Cobbett 1762-1835, British Journalist, Reformer
If you look at the chart you will notice that platinum has been soaring in value when priced in terms of Palladium. Historically the difference between the two has always been 100-200 dollars. Only from Oct 2000 to April 2001 did the difference widen to about 400 dollars; this was due to momentum players jumping in and taking palladium up from 700 to 1040 to put in a nice blow off top. The most important thing you will notice is that the up trend line has been broken. You will also notice that we are in a tight channel formation that looks like it could break to the downside any day. When you have a channel formation after a huge run up, 8 out of 10 times the next move is always to the downside. This chart illustrates that the price differential between the two metals is most likely going to move back to their historical levels. So either platinum is going to do nothing while palladium rallies (hardly likely) or platinum starts to correct while palladium plays catch up. This is yet another piece of evidence indicating that Palladium is extremely oversold. Look carefully at the graph above and you will notice two negative divergences; another warning that the ratios are going readjust soon.
You see many places stating that platinum can be used instead of palladium in the manufacture of catalytic converters but these two facts should help dispel those rumours
- Palladium catalytic converters are far superior to converters that have only platinum in them
- Why would anyone want to spend several hundred dollars more buying platinum when palladium can be bought at such low prices and makes far more efficient catalytic converters
Given the fact that the only way to improve profits is through cost cutting measures it is hard for us to imagine automobile manufacturers choosing platinum instead of palladium
Palladium is more or less sitting on a strong area of support. Palladium is an ultra long-term play. The situation we are in is very strange this metal could tests its lows once again just to shake everyone up or it could start to take off from these levels. When palladium moves it takes off very very fast, we experienced a little bit of this move early last year when it moved like a rocket from the 210-220 area all the way to the 340 plus. . The risk to reward ratio is very good in the long term. No matter what everyone says, there is a limited supply of palladium and it is essential in the manufacture of catalytic converters. Furthermore most of the palladium comes from Russia and they could suddenly start playing games like they did from 1998-2000 to boost the price of this metal. If they were capable of doing it once, they are certainly capable of doing it twice. In addition they must be smarting from the huge drop in prices. Palladium has dropped a whopping 86% from its highs in less then 4 years. To put this into perspective, Gold corrected 68% from its highs (high of about 800 and low of about 250) over a period of 20 years.
Platinum has dipped below its second up trend line if it does not trade above this up trend line soon, then it is most likely going to test its main up trend line. Ideally it would test the 500-550 areas during which time palladium will most likely rally to bring the price differential between the two back to historic levels. If platinum were to dip to these ranges it would make a superb buy.
Nothing great is created suddenly, any more than a bunch of grapes or a fig. If you tell me that you desire a fig. I answer you that there must be time. Let it first blossom, then bear fruit, then ripen.
Epictetus 50-120, Stoic Philosopher
© 2005 Sol Palha
26 February 2005
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