Palladium ETF (PALL) Plunges: Now Screaming “Buy”

by on May 20, 2010 | ETFs Mentioned:

As debt concerns continue to plague the euro zone, many investors are beginning to temper their expectations for global growth in 2010. As the wave of uncertainty washes over markets, investors have been flocking to safe havens, sending gold prices to all-time highs. Other precious metals haven’t been quite so fortunate; an increased possibility of a recession in the euro zone, weak car sales, tame inflation figures, and a stronger dollar formed a perfect storm over palladium in recent sessions, sending prices of the rare platinum group metal plummeting by more than 15% over the last week.

On Wednesday, the ETF Securities Physical Platinum Shares Fund (PPLT) fell by 4.1% while the physically-backed Palladium Shares (PALL) sunk close to 7.6% on the day (see Three Key Differences Between Platinum and Palladium). Some are blaming the German plan to ban short-selling as a main catalyst for the sharp decline in precious metals as investors looked to sell holdings in metals in order to ratchet down their level of risk ahead of the short-selling bans on equities and debt. “Investors are just throwing in the towel and selling commodities across the globe,” said Adam Klopfenstein, a senior market strategist at Lind-Waldock in Chicago. “There’s a lot of fear about owning riskier assets.”

The palladium ETF looked likely to extend those losses in Thursday trading, as prices in London fell as much as 10% to the lowest level since mid-February. As the losses continue to mount, it seems as if speculation in precious metals markets is driving prices low, with active traders jumping in to exacerbate the selloff. Palladium was on track for its biggest daily percentage decline since 2008, hitting a session low of $410.65 an ounce on Thursday.

After surging to start the year, PALL has lost more than 15% in the past week and almost 19% over the past month (even before Thursday’s open). In the wake of this sharp downturn, some investors see PALL as a compelling contrarian play for investors with a long time horizon who are willing to endure volatile days like the one we saw on Wednesday. “Weaker equities and the reduction in risk have prompted liquidation in platinum-group metals,” James Moore, an analyst at in London, said in a report. While the metals are at risk of a “deeper correction” for now, “improving fundamentals should see both maintain their longer- term trend.”

This long-term trend to the upside is buoyed by a report that Russia, the world’s largest palladium producer, may have exhausted state inventories of the precious metal removing a key source of global supply, according to OAO GMK Norilsk Nickel. Russian state supply is currently the third-biggest contributor to world supply suggesting that despite this large drop in prices, PALL could continue its ascent higher in the coming quarters as the Russian state supply is moved from the equation (see What’s Driving The Palladium ETF?).

A resurgent global automotive industry could also lend support to palladium prices in coming months. General Motors recently reported its first profitable quarter since 2007, and demand for automobiles in emerging markets remains strong. Catalytic converters account for a significant portion of global palladium demand, forging a typically strong relationship between the health of the auto industry and the price of the precious metal.

It’s now obvious that the speculators have jumped into palladium markets, making for an unpredictable and volatile short term outlook. But for investors with some tolerance for risk and a longer time horizon, PALL certainly seems like a value buy at its current price point.

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Disclosure: No positions at time of writing.