Palladium Stock Up 65% Since Coverage; More Room to Run?

With the recent volatility in the gold and silver markets, having some portion of a portfolio in palladium investing might make long-term sense, as it is an industrial metal, as well as a store of value. While the economies around the world are slowing, this obviously is impacting many markets, including palladium investing. While the demand side of the equation might not be growing rapidly, there could be supply issues that might propel prices higher. If that were to be the case, some people might want to consider palladium investing and junior mining companies for additional upside capital appreciation.

An interesting report by the company Johnson Matthey stated that it’s highly likely that the palladium and platinum market will be in a deficit. Such a scenario would certainly be bullish for palladium investing and junior mining companies. Jonathan Butler, the author of the report, states that he believes there will be a significant reduction in the supply for two precious metals: palladium and platinum. (Source: Matthey, J., “Platinum Market Forecast to be in Deficit in 2012,” Platinum Today, November 13, 2012.)

The report states that for the palladium investing, there will be a two-million-ounce swing from a surplus to a deficit this year. According to the findings within the report, palladium supplies from South Africa are forecasted to decrease by six percent this year, along with a decrease in the sale of Russian stock of precious metals. Conversely, palladium demand for catalytic converters is expected to rise seven percent, to what the report states is a new high of 6.5 million ounces. With vehicle sales continuing to move up strongly, this increased demand will help propel the supply and demand dynamics towards palladium investing.

While there are short-term worries about world economic expansion, over the long term, there will continue to be growth in terms of the population and the percentage of the world that is moving up into the middle classes. This means increased consumption for both automobiles and electronics, driving demand and interest in palladium investing over the next several decades.

There currently is a lack of junior mining companies specifically involved in palladium investing, as many extract multiple precious metals. One of the more interesting junior mining stocks for those interested in palladium investing is Stillwater Mining Company (NYSE/SWC). This company extracts, processes, refines and smelts a variety of precious metals, including palladium and platinum.

 

Chart courtesy of www.StockCharts.com

I made my readers aware of Stillwater Mining back in July when it was trading at $8.45. In September, the stock price jumped to $14.00 per share, a 65% return in two months. Clearly, such a move as this is unsustainable, and a pullback was in order. As can be seen quite evidently on the chart, the stock pulled back within the Fibonacci retracement levels. Following this consolidation, I believe a sustained breakout to either side will signal the most likely direction for Stillwater.

Junior mining companies are closely tied to the spot price of the commodity. As palladium investing goes, so do the interconnected junior mining companies. Junior mining companies are inherently risky, but also provide a high level of potential reward. At this point, while there is economic weakness as a possible headwind, we have three underlying drivers for the fundamental case for palladium investing; these include extremely easy monetary policy by central bankers around the world, a massive increase in new car sales, and a potential supply disruption that might create a deficit in both palladium and platinum.

In addition to the fundamental drivers for palladium investing, as long as the junior mining companies remain above support, we should see the bullish situation continue. If junior mining companies fail to hold support, this would be a sign that large institutional investors and insiders knowledgeable with the underlying business are questioning the future viability of the company, and possibly this sector. This type of warning sign should alert investors in junior mining companies to take profits and wait for a clearer picture to emerge.