CEA Portfolio Update – January 2015

| January 27, 2015

 

ECB Pulls Out The Growth Bazooka!

As you know, I sent out an email on January 9th, alerting you to the buying opportunity in the Market Vectors Gold Miners (GDX).

Here’s additional insight into why we made this trade, and how it’s performing thus far.

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The European Central Bank (ECB) just shocked the investment world…

After years of avoiding quantitative easing (QE), the ECB is finally embracing the controversial monetary policy.

As you may know, QE is what brought the US out of the Great Recession, which started in 2008.

What is QE exactly?

With interest rates already near zero, central banks need another way to stimulate their respective economies.

So they take to printing presses, creating money out of thin air. The central bank uses that money to purchase government bonds from financial institutions like banks and pension funds.

Not only does the “new” money used to purchase bonds increase the amount of cash in the financial system, but it drives down interest rates as well.

With rates lower, consumers are encouraged to spend and businesses are motivated to expand- thus stimulating the economy.

Sounds all well and good right?

Not so fast.

There are potential downsides to QE… 

With so much money being created out of thin air by the central bank, the risks of excessive currency debasement grows. When a currency weakens, it loses purchasing power.

There’s another name for this monetary phenomenon- inflation.

And astute investors know one of the best hedges against inflation is- you guessed it…

… gold and silver.

As you may remember from our trade alert a few weeks ago, gold started trading differently in early 2015. Instead of falling against the rising US Dollar like it did for most of 2014, it started rallying along with it.

At the time, I didn’t understand why investors were suddenly gobbling up the metal at a feverish pace.

But I did say this…

“I get the feeling investors are starting to realize global central banks will have to do much more to stimulate growth in 2015”.

When the ECB’s stimulus news hit the wires a few weeks later, it all made sense. Someone had leaked the news and well-placed investors were getting gold before the ECB made the official announcement.

Now, I’m sure you’re asking…

“Why did we go long the Market Vectors Gold Miners (GDX) instead of gold?”

The answer is simple. With 50% of mid- and large-cap gold miners trading below book value, aggressive investors were simply waiting for the right moment to jump into the industry.

And when gold started rallying earlier this month, they did just that…

Gold vs GDX

As you can see, since initiating our trade on the January 9th, GDX has clearly outperformed the price of gold. I expect this outperformance to continue as long as gold keeps rallying.

As I write, we’re sitting on an 11% gain in GDX. Let’s keep holding the miner ETF for higher prices as inflation wary investors accumulate gold.

Now listen closely…

Since GDX has rallied in our intended direction, I recommend you raise your stop loss order to $19.90, which is 10% below yesterday’s GDX closing price.

While we’re sitting on solid gains with the potential for much higher prices, one of our prime objectives is keeping downside risk in check. Keeping a stop loss 10% below current prices does just that.

 

Commodity Review

Commodity Ticker Current Value Last Month Change
Energy JJE $11.37 $9.12 -19.8%
Grains JJG $40.79 $36.16 -11.4%
Industrial Metals JJM $27.58 $25.81 -6.4%
Precious Metals JJP $56.55 $61.83 +9.3%
Softs JJS $39.68 $39.88 0.5%
Livestock COW $29.72 $27.11 -8.8%
ALL COMMODITIES DJP $31.30 $28.56 -8.8%
As of 01/26/15

 

Energy Commodities

No doubt about, bears are still in full control of the crude market. Ever since the Organization of Oil Exporting Countries (OPEC) announced they’d keep production steady in 2015, the price of the commodity has spiraled lower.

In fact, since OPEC made their historic decision in late November 2014, the price of West Texas Intermediate (WTI) is down an astonishing 38%. Even more incredible is the fact WTI has suffered a 55% downturn over the past six months!

Where’s the bottom for this commodity?

Since the global crude market is now trading on pure market forces instead of OPEC’ slight of hand, there’s no telling how low crude can go. Given the severity of the sell-off, there’s a growing possibility WTI touches the $33 low set in early 2009.

For now, it’s best to just steer clear of the oil market. While buying an inverse oil ETF that benefits from falling oil prices is a legitimate strategy, the risks outweigh the benefits. One geopolitical event could shift investor sentiment from bearish to bullish in an instant.

What about natural gas?

It’s been a tough few months for natural gas. Despite a few cold spells sweeping across the Eastern and Central US the past few weeks, the commodity is stuck near 52-week lows at $2.80 mmBtu.

Unfortunately, an abnormally warm December set the natural gas market off on the wrong foot for the winter heating season.

Once investors realized the balmy weather was going to keep overall inventories from evaporating like they did last winter, they sent the commodity swiftly lower.

While I’m still bullish on natural gas in the long run, it’s unlikely we see dramatic price spikes like last winter.

As a result, it’s best to cut our losses in the US Natural Gas (UNG) while we can. After all, once the shoulder season arrives this Spring, it’s not out of the realm of possibility to see natural gas drop to the $2.50 area or lower.

 

Grain Commodities

There’s absolutely nothing exciting about the grain markets right now. Investors are twiddling their thumbs waiting for more information regarding the looming start of the Spring planting season.

Our position in the Teucrium Commodity Trust Corn Fund (CORN) is trading at $25.83, which is a 9% gain from our $23.70 entry price.

While it’s tempting to take profits on this trade, I suggest we hold this position at least through mid-year.

With corn still trading near 4-year lows, it’s likely US farmers hold back on their planting ambitions this year. It simply isn’t in farmers’ best interest to produce another bumper corn crop. As you may remember, last year’s huge crop sent corn plummeting from $5.25 a bushel down to $3.25.

Remember, we have a very low cost basis on this trade. Let’s keep holding CORN for another rebound to higher prices this summer!

 

Industrial Metals 

No doubt about it, copper bears are roaring in early 2015. Once the commodity broke below $2.80 a pound earlier this month, it was lights out. The red metal plunged as low as $2.41 in recent trading as fears mounted over the strength of the global economy.

But here’s the deal…

Given the ECB’s robust stimulus plan, along with potential easing measures out of China, continued downside in the metal is likely limited.

 

Precious Metals

Believe it or not, gold and silver are the top two performing commodities thus far in 2015- silver is up 15% while gold is up 8%.

What’s more, platinum is up 3% on the year thanks to value buyers scooping up the metal on the cheap. It’s important to note that platinum is less expensive than gold at $1,256 per ounce.

However, palladium is still suffering yearly losses of 2% due to the fact it’s stuck in trading range between $750 and $820.

See this month’s trade update (above) for additional information on precious metals.

 

Softs

Much like grains, the soft commodity complex is filled with ambivalent price action. While it appeared coffee was ready for an early year bullish run, the commodity sank back to multi-month lows at $1.62 a pound in recent trading.

I’m keeping a close eye on the coffee market for signs of South American weather developments, which have the potential to send the commodity upward in 2015.

What about cocoa?

The West African commodity is sinking to 12-month lows at $2,743 a ton in recent trading.

Investors are becoming increasingly bearish on cocoa thanks to a report from the Cocoa Association of Asia, which revealed grindings for the fourth quarter of 2014 fell 17% from a year earlier.

Since Asia is responsible for a large (and growing) portion of global cocoa demand, weakening grinding data from the region is a clear bearish signal for prices.

 

Livestock

Feeder and live cattle are finally experiencing a much-needed price correction. The spot live cattle price is down 9% year-to-date while feeders are down nearly 4%.

What has these commodities on the defensive?

Last year’s bullish run to record price highs dented demand. Recent USDA reports reveal US feedlots grew increasingly uninterested in purchasing feeder cattle at the lofty prices seen in October and November of 2014.   Feedlot margins simply became too tight at those never before seen prices.

What’s this information mean going forward?

We’ll likely see continued price weakness in early 2015 as the market finds a value area where feedlots really start opening up their pocketbooks again to purchase cattle.

 

Category: Commodity Trading

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