My new pick this week is an attempt to capitalize on the rise of commodities, without piling into investments in gold and silver that already have started to take off. I am recommending an alternative precious metal in the form of ETFS Physical Palladium Shares (PALL). This exchange-traded fund (ETF) holds palladium bullion as a way to replicate, net of expenses, the commodity’s spot price.
According to British refiner Johnson Matthey, palladium prices could rally 20-30% over the next six months. The precious metal company predicted in its most recent annual report that palladium prices could surge to $700 an ounce, up from $522 on Friday. That’s a potential uptick of 34%.
Key reasons for such a jump stem from a combination of improved fundamentals and the increased popularity of palladium ETFs among investors.
As far as the favorable fundamentals, palladium is used primarily in the production of catalytic converters and is linked to the fortunes of the automotive industry, which accounts for about 60% of consumption. Indeed, U.S. auto sales jumped 24% in March, compared to the same month last year, while Chinese auto sales reached a record 1.7 million, up 56%. In addition, J.P. Morgan characterized China’s demand for platinum and palladium as "absolutely relentless." Manufacturing indices also improved in the United States, China, the United Kingdom and Germany, among other nations. Palladium is an essential catalytic component to fuel cells, which only now are beginning to come into practical use as a power source.
Further, investors have increased their demand substantially in the past year for new ETFs backed by physical metals. For example, investment in physical palladium rose by 48.8% last year. Johnson Matthey forecast another large increase this year. Five palladium ETFs are backed by the physical metal, meaning that when a share in an ETF is added, a certain amount of palladium is set aside in a warehouse. ETFS Physical Palladium Shares, launched in January, already has racked up more than 600,000 ounces. Palladium ETFs held more than 1.7-million ounces of the metal, the equivalent of about one third of its annual global consumption, as of April 9.
With the price of palladium down a bit today, we have a nice opportunity to make this investment at a slight discount. So, buy ETFS Physical Palladium Shares (PALL), and set your stop at $43.50. There are no options.
Portfolio Update
UltraShort Euro ProShares (EUO) hit a record high of $24.60 on Friday, ending the week 9.19% higher. With the markets shaking off Europe’s trillion-dollar bailout of the euro, add back the half position you sold last week. Since my initial recommendation on Jan. 4, EUO has soared 33.84%. Your bet against the European currency is back to a BUY. Tighten your stop to $22.00.
CurrencyShares Japanese Yen Trust (FXY) fell back slightly this past week. But the yen remains a place global investors escape to when markets swoon. FXY remains a defensive BUY.
P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy or on my new blog, NickVardy.com.
