Silver & Palladium: Partners in CRIMEX

By Joshua Enomoto, contributor

Ah! What a week it has been! After the precious metals, particularly silver, fell below precipitous support lines, they made a comeback, at one point appearing poised to charge through key resistance levels on its way to a full retracement of the August rally and beyond. Unfortunately, fiscal cliff hangovers from a seemingly dead-locked Congress eroded the major market indexes, and took down the metals in its wake. However, despite the setbacks, both gold and silver are still above crucial psychological and technical points of support, at $1,700 and $32, respectively. Fundamentally, the precious metals should be trading higher, but a significant amount of safe-haven demand is propping up the US dollar, at least in the short-term. From a non-doomsday preppers’ perspective, this is an understandable, albeit misguided phenomenon as a majority of investors sit on the sidelines until the markets move with some directional conviction. In the meantime, the rising dollar continues to apply negative pressure on the precious metals, which may tempt many commodities bulls to abandon ship. Silver investors in particular may be suffering through a case of cold feet considering the historical volatility of the white metal. However, a rising and correlative strength in another white metal characterized by obscurity and rarity may help to stem investor fears.


Let’s start off with a technical snapshot of spot-silver:

Silver (11172012) A


The biggest disruption in the corrective recovery occurred on Nov 2nd, where a huge selloff in the COMEX dropped prices into high-$31 territory. This is the point where many silver investors lost their nerve and took the first visible exit. However, the market rejected the idea of silver going lower, as the next few sessions took the metal comfortably into 32 dollars. Even with the short-term trend weakness induced by the fiscal cliff, the overall price action is still above the 20 day moving average. The question now is, will silver build upon support levels to take out higher resistance barriers?


The long-term technicals suggest that the answer is yes!


Silver (11172012)

Silver bulls can take comfort in the fact that over a 2 year time period, the $26 price point has acted as extremely strong support and nothing short of a Black Tuesday event will take the white metal below that line in the sand. On the forward looking side, a bullish pennant formation resulted in a breakout move from $28 to $35, and we are now in the upper middle of that range. As barometers to gauge the strength of future price movements, I have plotted Fibonacci retracement levels of the parabolic price move to $50 that occurred in late April of 2011. Currently, we are sitting just underneath the 38.2% retracement level, so a trip into $33 would be the first significant price target. Ever since the April high, roughly half of the ensuing price action occurred below the 38.2% retracement level, but above the $26 critical support line. If you believe, like David Morgan does, that we’re still in a commodities bull market, this suggests that silver is building massive support for another shot at parabolic highs.


Let’s have a look at the spot price of the “other” white metal, palladium:


PALL (11172012) C

Palladium, being the rarer metal and therefore subject to the conditions of a thinly-traded market, is characterized by choppy, wide-ranging volatility. In the physical bullion market, palladium-based products are hard to come by and have unattractive buy-sell spreads when compared to gold or silver bullion, or even platinum for that matter. The key selling point, though, is that palladium is far rarer than either gold or silver, and has unique properties that will undoubtedly be at the forefront of future medical and industrial technologies. Potential investors, however, may have been turned off by its price decline during this year’s summer doldrums and the always bearish Head-and-Shoulders pattern that occurred over the fall. But against the backdrop of this downward momentum, the bears failed to take palladium below $600, and the price is in fact rising, albeit in a choppy manner. I believe we are seeing the developments of a new line of support as indicated on the chart above, although the price will need to break past the resistance point represented by the H&S neckline in order to confirm this.


Let’s take a look at palladium’s 3-year chart:


PALL (11172012) D


Aside from the lack of a parabolic move, the long-term trend for palladium looks quite similar to silver. For palladium, the critical support line is at $550, a level that has held true for over 2 years. After suffering through a protracted downside in the precious metals market, the technicals charted a bullish pennant formation and a breakout ensued. Of course, it wasn’t a sustained breakout since the upside was in the form of a rising Head-and-Shoulders formation and the current spot price is just underneath the 38.2% Fibonacci retracement of the 2011 high of $850. Still, the palladium bulls, despite the bearish technical overtone, and despite a strengthening dollar, appear to be shrugging off the negativity and poised to move higher. Seasonality wise, this would be in line with expectations, as prices in November tend to be lower than what is observed in the following January or February.
While the short-term noise in the precious metals appear bearish, the long-term faithful have seen this all before. The dollar is strengthening but eventually, the fundamentals will inevitably erode those ill-gotten gains. The lesser of two evils is still evil, and the greenback will not get a pass. Therefore, look for silver and palladium to make strong gains next year as both are tethered in more ways than one.