Crouching Tiger (Palladium), Hidden Dragon (Platinum)

Summary

·         Palladium (Crouching Tiger) has a classic chart setup into 14 year highs. Initial finger-spread target from the 25-year chart projects prices to around $1,300.

·         Platinum (Hidden Dragon) seems to be forming a massive falling wedge or rectangle on the 25-year charts. 3-5 year Finger-spread target: $1,100 higher than the current $1,422 price.

·         Projected initial targets for both palladium and platinum may be exceeded before this secular bull-run has breathed its last.

·         Tigers and (Eastern) Dragons can look to make good money from this PGM Bull run, but at some point down the line (Western) Dragons are likely to get “smoked”.

·         Additional background on the topic by this writer can be found in the Seeking Alpha archived article The Palladium Bull Run is Underway

The martial arts film Crouching Tiger, Hidden Dragon, released in 2000, went on in the U.S. to become one of the highest – if not the highest - grossing foreign-language film in history. It is great entertainment, (especially the fanciful segments where the main characters sword-fight while running through the tops of bamboo forests high above the ground), which this writer loves to watch again at least once a year. For investors, the movie title offers an intriguing metaphor and some trading thoughts about the rapidly evolving PGM (palladium and platinum) bull market.

By many accounts, palladium and platinum supplies are moving into record deficit territory, even as demand ramps up around the globe. Used primarily for catalytic converters, but also with other industrial and medical uses, not to mention investment bullion demand and applications in jewelry, these PGMs look like they are going to experience upward trending price volatility for the next few years.

As this is being written, palladium notched its highest close in 14 years, with the nearby futures’ contract finishing on the highs of the week at $909.55 the ounce. With the caveat that chart interpretations are to some extent art – subject to being interpreted in the eye of the beholder – the science they also represent almost compels us to have a look and see what reading the tea leaves of the daily-monthly -yearly price tracks might tell us.

Source: All charts in this report, courtesy of Stockcharts.com

First, we have a series of higher highs and higher lows, the classic shape of a bullish trend on the run – upward! Second, from the daily chart we can see that so far, there have been three times when a $50 decline took place. In each instance, the price powered higher soon thereafter, shooting up into new high ground. The moral? Whether accumulating or taking a new position, consider buying into $50 declines. This works for futures traders, but also can help stock investors who want to buy a producer or one of the several actively-trading PGM ETFs. So, buy the dips until you think it’s over; just be careful about overstaying your welcome, trying to grasp that last “one-eighth” and running the risk of becoming a dip yourself.

A look at the 25 year palladium chart enables us to calculate a finger spread target of around $1,300 (adding the 2009-11 run amount from $180 – c. $860 = c. $700 + the ensuing decline level of around $550, thus our initial target of $1,250-$1,300.

So what about Platinum?

At first blush, platinum’s price chart looks a bit anemic, even though the supply situation as noted by the authoritative PGM source Johnson Matthey remains bullish. JM noted in its May report that “…the price (platinum) managed to finish the month 2.8% higher, simultaneously opening up a $200 premium to gold once again, for the first time since January.”

If you analyze platinum’s weekly, monthly and even yearly charts out to 5 years, you may be tempted to dismiss its potential for near-term price strength, in spite of bullish supply-demand talk coming in from all quarters. But wait, there’s more! Zero in on the 25 year chart, and a much different picture emerges. Instead of what on the 5 year chart looks like a rising wedge (bearish), the 25 year chart looks like prices for the past couple of years (incorporating 2014’s seemingly bearish action) are forming a large declining wedge (bullish). If this is your interpretation (as it is mine) then the finger spread target for platinum’s next major up move – whenever it decides to get underway – can be calculated as follows: Add $1,100 (the length of the 2009 – 11 up-leg) to the current price of around $1,425, and you get an initial target of at least $2,500 – well above platinum’s all-time nominal high in the area of $2,200. The ultimate top, once this secular run gets into high gear may exceed this $2,500 target.

A (Crouching) Tiger can make money

A tiger carefully stocks its prey, gets into position, makes the kill and then settles down to feast for a while. It doesn’t try to take out the whole herd, in the process running the risk of breaking a leg or losing an eye. A tiger investor can make good money from this PGM bull-run, which should last for at least for the next 3-5 years. Seek to take a substantial profit from your positions, but don’t try for the whole pie.

As can an “Eastern” (Hidden) Dragon

Eastern dragons are benevolent. In spring and summer they reside up in the sky and go about their business in a productive manner. They are very busy, but not year ‘round. In the fall and winter they sleep underground, staying out of trouble. As with the Tiger, a dragon investor can also take significant profits from the platinum and palladium expected bull-run. They can hold a core position for what is believed to be most of the market’s upside action, and even do some in/out trading, but they don’t have to try and play all the swings. And they certainly don’t need to stick around until after the last inning, giving back a lot of their hard earned profit as a result.

But not a “Western” Dragon

The dragon as portrayed in European mythology tends to be an indiscriminate glutton. It hangs out in caves, collects uncountable amounts of gold, diamonds and jewelry, as well as a maiden or two from a nearby village. What it intends to do with this largess, not to mention the maiden, has always been a mystery to this writer.

Nonetheless, being possessed of seemingly limitless avarice, the “Western” Dragon sooner or later attracts the attention of a valiant knight, who proceeds to either fill it full of arrows, or chop off its head with a sword. The analogy, for the investor who gets too greedy playing the PGM run, is that the forces of distribution will sooner or later take him (or her) to the cleaners. Instead, pay attention to the 17th century Priest, Baltasar Gracian, who well before his time, wisely noted, "Place your winnings under cover when they are sufficient or large. Fortune soon tires of carrying anyone long on her shoulders."

“The cure for high prices is high prices”

Rick Rule famously made the preceding statement, and it’s true. This will not be a “forever bull market”. Sooner or later, the run will be relegated to the history books. The expectations of today’s supply-demand premise, which are valid- will at some point be fulfilled and rendered invalid, leading inexorably to a new long-term bear market.

What factor(s) might bring about this sequence of events? A reasonable guess is that it will take at least 3-5 years before the primary supply-side questions start to be addressed in a manner which seriously adds to the amount of above-ground stockpiles. Some possibilities: Zimbabwe decides to pursue a ‘rational’ policy of allowing mining companies to develop its potentially enormous PGM deposits and actually take home a profit for doing so -admittedly, at present, based upon the country’s history, a questionable assumption.

At some point, after a multi-billion dollar development expense, a large PGM property in South Africa’s Limpopo province may come on stream. This very high-grade, relatively shallow PGM deposit could be amenable to mechanized harvesting, as opposed to other SA mines, which involve ore extraction by way of intensive, dangerous, pain-staking human excavation from cramped stopes deep underground.

Furthermore, as prices rise, increased attention to recycling will no doubt play a role in plugging some of the supply gap. Unexpected breakthroughs in nanotechnology could result in a smaller PGM/unit use in auto and diesel engines. Another wild card might be a move to consistently de-hoard PGMs from the ETFs now aggressively accumulating these metals.

A PGM moon-shot taken out by an asteroid?

Down the line, perhaps in a decade or so, meteor and asteroid mining could play a huge role, possibly even ending the bull market if, by that time it had run too high and gone on for too long. Last year at a conference in Vancouver, B.C., Christopher Lewicki of Planetary Resources, Inc – who has a Main-belt asteroid named in his honor (13609 Lewicki) - gave a talk on this subject.

Lewicki, who performed system engineering development and participated in the assembly, test and launch operations for both Mars missions, had this to say: “A 500 meter PGM-rich asteroid has more platinum than has ever been mined (on earth).” Such an occurrence could make the phrase “PGM game-changer” sound like an understatement!

Unlike gold and silver prices, which, even in the short term tend to be closely correlated - demonstrated by Adam Hamilton to be as high as 90% - platinum and palladium are quite capable of moving to separate drummers and on their own particular time schedule. When palladium made its moon shot to all-time highs (so far) in 2000, platinum hardly budged. Then in 2008, as platinum itself soared skyward by over 200 %, and although palladium doubled as well, it moved by a much smaller percentage than its original vertical rise 7 years earlier. This time, it looks like both metals may join the chorus, vying with each other for top bull-run honors. This writer’s guess is that palladium will make a bigger percentagewise move than platinum.

Some closing advice:

Buy (into severe weakness) when it’s hard, and sell (into great strength) when it’s hard. Avoid using of margin like the plague. David Morgan was trading during the palladium rocket launch in 2000. He remarked that at one point near the terminus of that rise, the exchange required a “margin” deposit for each futures contract of…200% of its value! Don’t let others lead your thinking, rather than informing it – an approach that should help you to void drinking too much of your own – or anyone else’s– “kool aid”.

Decide beforehand how much is enough (for you). In a book about silver due out later this year, David Morgan at themorganreport.com will have a chapter devoted to strategies for “leaving the market too soon”. Using techniques applicable to dealing with any or all of the “precious metals’ four” – gold, silver, platinum and palladium – these approaches may help investors stay in long enough to capture a very large chunk of the entire bull move, while sidestepping the temptation which the late, great Jesse Livermore discussed, of attempting to grab “the last one-eighth”. As a counterweight, keep in mind also, David’s admonition that 80 – 90 percent of a bull market’s gains for the entire move can accumulate during the last 10% in time of the full run.

Try not to be too greedy or to, as they say, to “confuse brains with a bull market”. And remember that you heard this (somewhat contorted) phrase here first:  “Tigers make money and (Eastern) Dragons make money, but (Western) dragons get smoked”!