Uncommon sight among brokers’ product offers, palladium is a newcomer in traders opportunity scanners. Even rarer is to see some educational material on key aspects of trading palladium. This article is following the series devoted to precious metal trading for traders that come from forex. The system we have devised follows a structure and can be applied to the precious metals market too, although you would need to be familiar with it as this article is just an add-on.
In the precious metals article, we have talked about the general fundamental and technical adjustments from forex trading so you can refer for more details. Spot palladium or XPD/USD if traded against the US dollar is one of the most lucrative assets counting all the 28 major forex currency pairs, and it has its own price action detached from other markets correlations. We will address the fundamental aspects of palladium and technical facts that can help all traders but understand the principles of supply and demand apply to precious metals more than in forex, a key difference that can also cause a change in our algorithms.
Palladium became the most expensive out of the 4 precious metals we focus on. XPD took charge over gold just a few years back, rallying multiple times over and over. Today it is more precious although this is not the important part nor why it is a lucrative asset to trade if done the right way. The price jump attracted the views of many traders causing the brokers’ reaction and add it to the asset range. Nowadays you can even buy physical palladium coins and bars. Since 2016 palladium quadrupled in value, it had a bull rally spanning over 3 years and is still going despite all. Of course, there is a fundamental reason for this bullish sentiment and a lot of similarities with platinum. The main difference is that platinum is used for purification filters used on diesel engines whereas palladium is for gas engines.
It is also not mined explicitly, only South Africa and Russia have palladium specialized mines, mostly palladium is a by-product from other resources such as nickel and silver. So, the supply structure of palladium is almost the same as with platinum, the fundamental driver for the demand comes from one country – China. This industrial giant with an overwhelming factory building progression drives pollution and also consequently giving cars a priority over the more affordable vehicles such as motorcycles and bicycles – the ones with lesser pollution impact. Heavy polluters like China are about to have a serious problem with the ecology if this pace is going to continue in the next decade, and palladium is going to follow, sharply. Is it going to quadruple in value again is hard to say but the bullish outlook is almost for sure.
Supply is flat however, keep an eye on the China equities market. This country is the main demand driver but nowadays can be influenced by trade wars, blocks, and other measures by countries that see this progress as a threat. Even though the effect of these measures is not strong, just the news of them could shake trends we follow in the shorter term.
Aside from the supply and demand fundamentals, palladium is also moving independently from the other metals. The picture below depicts similarly looking charts but a completely different trend direction from August to October 2020. Gold (orange line) has lower highs after a bull run from July, silver too (sky blue line) but with different price action shapes. Palladium (black line) remained bullish and kept the momentum from July with higher highs and higher lows.
When you go to a weekly chart, palladium is also moving independently giving you another great asset capable of hedging. The weekly palladium chart is going to show 3 steep bullish runs from mid-2018 till now, with two brief corrections in march 2019 and 2020 once COVID-19 started spreading globally. It even seems like the bull runs resumed in June this year since China got rid of the COVID-19. Long term investment overlook in the picture below shows palladium is one of the best choices since 2010, it almost never ceased to rise to today’s price of $2375 in October 2020.
Palladium trends are great for trend following strategies, the momentum keeps it flowing even they are not as smooth as with gold. Followthrough happens often triggering our Take Profit levels. Our algorithm sets the Take Profit level at 1xATR (14), however, you can set the factor to your liking. If you are not familiar with the structure we follow check our previous articles.
Trade palladium independently what other metals are doing. Whatsmore, you can even ignore interest rates decisions that could shake platinum and other metals trends, according to experience by professional prop traders. Volatility has increased in 2020 after all events involving China, which is probably the country in focus starting from the COVID-19 outbreak to trade wars and economic blocks of some of China’s biggest companies. Palladium reached an all-time high right before the pandemic close to the $2900 level. Is this a good time to buy after a correction? The answer is leaning more to yes than to a no since July palladium resumed its bullish trend with increased volatility and the same momentum.
To conclude, palladium is the honey badger, does not care what is going on and it needs a pandemic to stop it, but it seems just or a short while. It is hard to discern when it is a good buying point for the long term holding, the bullish trend continues. Also, it is hard to really know if it is going to crash during the pandemic and other fundamental events on the China equities market, right now price action does not imply a correction. Palladium is just a great hedge even for precious metals, the risk-off and risk-on sentiment in the equities and even interest rates do not affect It much. This is an anomaly that reminds of Bitcoin although the hype is with the China GDP and China’s strong progress. Unlike crypto, palladium is physical and will never come a zero in value whatever happens. Palladium is also getting popular, a good choice for buy and hold strategies. This metal is still new to the scene for some investors, a conservative view will still stick to the good ol’ gold and silver.
As a precaution, traders need to keep an eye if palladium is changing its independent nature, in the meanwhile, they are free to reap the mega trends rewards. Whatsmore, from a technical standpoint, indicators you have used in forex are probably not going to like trends like this. The system elements for trade exits and trend confirmations need to be changed. Volatility filters also need to change for weekly chart trading strategies if you plan to use a kind of long-term swing trading – an alternative if buy-and-hold for years is too boring and you also want more out of corrections. Volatility indicators simply need to cope with weekly timeframe price action movements that are not strong enough for most volatility/volume filters to trigger a signal. All this may require you to build and test a completely new set of indicators as our traders recommend, but this is a job professional traders enjoy doing.