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Pairs Trade: Long Palladium/Short Nickel

After today's large drop in the price of palladium, I felt there may be a trading opportunity out there waiting to be discovered. After doing some research, I stumbled over what I think will be a nifty long / short commodities trade. The positions would be long ETFS Physical Palladium Shares ETF (NYSEARCA:PALL) and short iPath Bloomberg Nickel Subindex Total Return ETN (NYSEARCA:JJN).

PALL is an ETF that is based on the spot price of palladium. This is accomplished by physically holding bars of this precious metal in a secure vault. JJN, on the other hand, is an exchange-traded note (NYSE:ETN) that tracks the price of nickel via the futures market. An ETN is an unsecured debt security issued by an underwriting bank and is backed only by the credit of the issuer. There is a possibility that an underwriter can default on the ETN, but that should not be a concern when it is shorted.

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by Steve Auger