What's Up (& Down) with Palladium

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"No market exemplifies uncertainty better than palladium."

No market exemplifies uncertainty better than palladium. Over the past four months prices for platinum's poorer relation have vacillated more than $130 an ounce and now are in middling ground at the $477 level. Well, they were at that level. This morning, palladium jumped $7, breaking above near-term resistance as it was swept up in a metals rally.

A lot of palladium's price action coat-tails platinum. Analysts at South Africa's Standard Bank see a fundamental floor for platinum at $1,500, a view fostered by production cost pressures, regulatory issues and labor concerns. The bank's six-month target for platinum is $1,800.

As platinum's cost rises, palladium's fortunes as a substitute metal improve. But there's a fear factor in the market, too: recession and its effect on industrial demand for palladium. If auto production slows, a lot of palladium demand gets sucked away. Hence, the tug-and-pull market.

Notice that after the price break in April, palladium's lows have gotten progressively higher and its highs lower. A narrowing trading range bespeaks a coming breakout. The questions traders ponder now are when and in what direction.

Producers, merchants, users and processors have been lightening their selling posture in futures since May.

Net short interest has shrunk by 4,855 contracts , or 32% over the past four months. The message here is that commercial interests view palladium's current price worthy of less and less insurance. Money flows into the ETFS Physical Palladium Shares (NYSE:PALL) have vacillated along with the metal's price.

Now, money flow and price move pretty much in lockstep, though money flow generally leads price advances. A breakout move to the upside ought to be heralded by an upwelling of capital. We're not at that point yet, but we'll certainly be keeping our eye on this market for just such a signal.

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