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Gold is getting hammered, and the pain in the sector is putting gold bulls in a panic. The yellow metal is down more than 27% year to date, and in just the past month, gold prices have tumbled more than 7%.
The latest decline in gold came on Tuesday, when it traded lower by as much as 2.7%, breaking down below very weak support levels around $1,225. About the only hope for gold longs here is to pray for a bad jobs number Friday, as that may keep the Federal Reserve from tapering sooner rather than later.
Yet aside from prayer, what can a precious metal investor do if he wants to stay in metals but get out of the sinking ship that is gold? One answer would be to seek shelter in another precious metal, one that's also benefitting from strong industrial demand tailwinds, and that metal is palladium.
Rather than trading palladium on the commodities futures market, a prospect I find fraught with difficulty, I prefer to use ETFs such as the ETFS Physical Palladium Shares (NYSE: PALL).
PALL has held up very well this year when compared to other precious metals. The ETF is actually up about 1% year to date versus the aforementioned 27% dive in gold. It's also fared far better than silver, which is down more than 37% so far in 2013.
So, in a year that's seen the biggest precious metals lose their luster, why has palladium held up so well? The main reason is increasing global auto demand.
In a recent research note, analysts Simona Gambarini and Nicholas Brooks of ETF Securities wrote, "We believe the palladium price has the potential to perform strongly over the next few months on a combination of price supportive supply and demand fundamentals."
The demand side of the equation, according to the analysts, is driven by the fact that over 65% of palladium demand comes from auto demand. Palladium prices also are strongly linked to the production outlook for vehicle sales in China and the U.S. And as ETF Securities' note reads, with "China auto sales expected to surpass 20 million this year, and US light vehicle sales forecasted to climb to 15 million, we believe palladium price has upside potential."
As for the supply side, palladium, along with platinum, is likely to be constrained for some time. According to a report from Barclays and Johnson Matthey, palladium and platinum used in automobile catalytic converters is, and will continue to be, in short supply.
Then there is analyst Daniel Briesemann at Commerzbank AG (the most accurate palladium forecaster tracked by Bloomberg over the past two years), who said, "Platinum and palladium markets show the tightest supply and demand among precious metals and probably will throughout next year as well."
The combination of strong demand for palladium used in automobile catalytic converters, and the tight supply conditions in the palladium market mean this precious metal is likely to do well over the next six months. Moreover, unlike gold, palladium prices aren't likely to be stifled much by the Fed's decision to taper or by machinations in the currency markets.
When supply and demand are on your side in a trade, the chances are pretty good you're going to make out well.
Recommended Trade Setup:
-- Buy PALL at the market price-- Set stop-loss at $62.87, approximately 10% below the current price-- Set initial price target at $83.82 for a potential 20% gain in six months
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