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Many investors consider precious metals to be an important asset class that offers protection against inflation. Gold and silver are the most popular metals and have been in extended price declines. Gold is almost 20% below its all-time highs. Silver is more than 40% off its highs. Platinum, another widely followed precious metal, remains more than 30% below its 2008 high.
I follow precious metals indirectly, through my 26-week rate of change (ROC) system. ROC allows me to identify the strongest asset classes, and this system has been bearish on precious metals for some time.
According to chemists, precious metals include ruthenium, rhodium, osmium, iridium and palladium. Only palladium is traded as an ETF, and I follow this metal, along with gold, silver and platinum in my ROC system.
In sharp contrast to the other precious metals, palladium is moving higher. The chart below shows the four tradable precious metals. Relative strength (RS) is shown at the bottom and only ETFS Physical Palladium Shares (NYSE: PALL) has a rising RS line.
One reason for the different chart pattern seen in PALL could be a fundamental factor. About two-thirds of the palladium mined each year is used in catalytic convertors for automobiles. This is an industrial use, and in that way palladium is different than other precious metals.
In addition to offering protection against inflation like other precious metals, palladium can provide investors with exposure to the economic cycle. Auto production should increase when the economy grows and decrease during economic contractions.
The next chart focuses solely on PALL and includes the stochastics indicator, which just gave a buy signal. PALL is also breaking out of a year-long consolidation pattern that offers a price projection near $84, more than 11% above the recent price.
PALL has only been available to trade since March 2011. To get a longer history for back-testing, I looked at palladium metal futures, which have data back to 1982. Over that time, stochastics has been a reliable indicator, profitable on both the long and short side. Nearly 60% of the buy signals were winners.
The technical picture of PALL is confirmed by the demand seen for the metal. Investors have increased their holdings in the ETF since the start of the year. This is significant because the assets in other precious metal ETF, like SPDR Gold Shares (NYSE: GLD), have been dropping.
Assets in PALL have jumped 18% since the end of December while assets invested in GLD have fallen by more than 12%. In the simplest terms, prices rise when there is more buying than selling, like we see in PALL, and prices fall when there are more sellers than buyers, as we see in GLD. This may seem obvious but buying and selling is the underlying cause of all price action.
Despite my bullish outlook on PALL, my 26-week ROC system is not bullish on precious metals yet. The system relies on a risk management rule to enter markets, and for now, the risk is still high for that asset class as a whole. PALL is the only buy among the 12 ETFs I follow in that asset class, so consider limiting precious metal trades to PALL at this time.
Once again, this week there are no changes in the 26-week ROC strategy portfolio and we continue holding:
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