CEA Portfolio Update – January 2016

| January 26, 2016

Are We On The Cusp Of Another Recession?

As you know, I sent out an email on January 7th alerting you to the buying opportunity in the SPDR Gold Shares $GLD.

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


Well friends, 2016 isn’t starting out so hot for the equity markets…

As you’re likely aware, the Dow Jones Industrial Average (DJIA) recently suffered its worst start to a year in history.

To be clear, the first 12 trading days of any given year have never been as bad as what investors just witnessed in 2016.

As it sits now, the DJIA is down 7.6% year-to-date, while the S&P 500 and Nasdaq have succumbed to downturns of 7.3% and 8% respectively.

What’s going on?

The word “fear” sums it up pretty well…

Market anxiety is building quickly over the health of the global economy.   Chinese and US economic data points from late December and early January reveal high odds of a looming global slowdown.

Here’s where it gets really interesting…

Believe it or not, the word “recession” is getting tossed around in the business media to

describe the likely outcomes of the current growth slowdown.  Such a situation would be a disaster for the US Federal Reserve.


As you’re aware, the Fed raised rates for the first time in nearly 10 years this past December.  With the US unemployment rate at 5%, the US Central Bank felt the time was right for their interest rate policy to start normalizing.

But here’s the deal…

The Fed is tightening monetary conditions just as the global economy is stuttering to a standstill.

If growth continues slowing, it will become brutally apparent the Fed will have to reverse course and reinstate their accommodative policies of years past.

It’s important to remember that since World War II, the US economy has had a recession every six years on average.  With the last recession officially ending in June 2009, it has been nearly seven years since the last economic downturn.

In other words, we’re overdue for a recession based on historical averages.

Fears of a 2016 recession has precious metals demand rebounding quickly… 

In fact, the US Mint reported 2.76 million ounces of American Eagle silver coins sold on the first day of 2016.  That’s about half the 5.53 million ounces that sold in all of January 2015.

What’s more, 60,000 ounces of American Eagle gold bullion coins sold on the first day of 2016, which is 75% of the amount sold in all of January 2015.

This surge in demand for physical gold and silver tells me investor sentiment towards the metals is improving quickly.  As long-time readers are aware, precious metals have been under bearish pressure since 2011 due to the lack of inflation in global economies.

To be clear, it’s not the thought of inflation that wary gold buyers are focusing on right now.  Instead it’s the metal’s “safe haven” status during times of global economic uncertainty that has demand soaring.

With that said, gold’s performance in 2016 will be closely linked to the performance of the global economy.  If economic data from China, Europe, and the US keep getting worse, the yellow metal will likely see new buyers rush in.

Let’s look at a chart…


As you can see, gold is starting off 2016 with a bang.  The yellow metal is up 5.6% year-to-date, trading at $1,120 an ounce.  Thanks to the upturn, our position in the SPDR Gold Shares $GLD has rallied beyond our maximum buy price of $106.00.

As a result, I recommend you keep your position at a “hold” until further notice.

Bottom line…

Folks, there are some enormous headwinds building for the global economy in 2016.  If recent economic data reports continue on its concerning path, I have little doubt a recession will pop up in the US economy later this year.


Commodity Review

Commodity Ticker Current Value Last Month Change
Energy JJE $4.49 $5.44 -17.5%
Grains JJG $31.19 $31.02 +0.5%
Industrial Metals JJM $18.15 $18.82 -3.6%
Precious Metals JJP $50.50 $49.68 +1.7%
Softs JJS $31.64 $32.76 -3.4%
Livestock COW $23.80 $23.01 +3.4%
ALL COMMODITIES DJP $20.09 $22.07 -4.7%
As of 01/25/16


Energy Commodities

It was another brutal month for WTI crude.  The commodity sank below $30 a barrel earlier this month as the end of Iranian nuclear sanctions spooked the market.

But here’s the deal…

An intense bout of short covering sent WTI soaring back above $30 late last week.  While some analysts are chalking the rally up as a response to the massive winter storm that hit the US East Coast this past weekend, I see something different.

You see, as oil drops to price levels not seen since 2003, sellers are finally getting exhausted.  In other words, prices are getting so low that short sellers are leery about establishing new positions that profit on further downside in crude.

After all, how low can the world’s most important energy commodity really go?

$15 a barrel?  $10 a barrel?  — Not likely.

Keep in mind, the oil market is a discounting mechanism. 

As a result, much of the Iranian supply situation has already been priced into the market.  While it’s possible we see another panic induced downturn into the mid-$20 a barrel range, I suspect another wild dose of short covering will soon follow.

As you know, we entered a long position in the US Oil Fund $USO in December.  With $USO crossing the tape at $8.54, we’re down slightly on this position.  But as I mentioned in the original trade alert, this is a trade we’re going to ride out come hell or high water.

In other words, stick with this trade, no matter what.  Just be sure to appropriately position size this oil trade so another market drop doesn’t become too painful to bear.

If you haven’t already established a position in $USO, do so now.  If you’re already in from December, keep holding your position until further notice.

What about natural gas?

Thanks to the final arrival of Winter on the East Coast, the price of natural gas held its ground the past month.  The gaseous commodity jumped to $2.50 mmBtu in early 2016 as traders priced in colder temperatures.

However, upside in natural gas will likely remain limited in coming months as there’s still an abundance of supply.  As of January 15th, there were 3.2 trillion cubic feet of gas in storage, which is 23% above last year at this time and 16.7% above the 5-year average.

Given the remarkable supply, it’s best to stick to the sidelines in natural gas for the foreseeable future.


Grain Commodities

Much like the rest of the commodity space the past six months, there has been little to get excited about with grains.  Corn, soybeans, and wheat are all trading in tight ranges near multiyear lows.

The most recent USDA World Agricultural Supply and Demand Estimates (WASDE) report was released on January 12th, and it did little to encourage bulls.  Supplies of all the major grains are abundant here in the US and around the globe.

As a result, trading in grains will likely remain subdued until the Spring planting season brings a bit of weather induced market uncertainty.

When a profit opportunity arrives in grains, you’ll be the first to know!


Industrial Metals 

Copper collapsed below $2.00 a pound earlier this month as investors factored in continued weakness in the Chinese economy.  As you’ve likely heard, economic activity is souring on all fronts in China.

In fact, the country’s recently released 2015 GDP reading came in at 6.9%.   That’s the slowest growth reading China has reported in 25 years!

Of course, the real question on everyone’s mind right now is whether China’s leaders can institute the right policies to create a soft landing in their economy.

Since the country is essential to global growth, it’s understandable why the uncertainty in China is causing so much concern for investors the world over.

Until we see signs of stabilization in Chinese economic data, as well as their markets, it’s best to steer clear of copper and other industrial metals linked to global economic health.


Precious Metals

Since we discussed gold and silver earlier in today’s report, let’s check in on platinum and palladium…

The precious/industrial metals plumbed out new multi-year lows in early 2016 as investors factored in building global economic uncertainties.

Remember, platinum and palladium are used heavily in the global automobile industry as an auto catalyst.  So it should come as no surprise that fears of a global economic slowdown would send the metals sharply lower.

While it’s clear platinum and palladium are offering investors incredible value relative to the lofty prices seen as little as two years ago, there’s simply too much uncertainty in the current environment to establish long positions in these metals.



It was a bad month for soft commodities…

The price of every asset in the softs complex fell over the past few weeks as fear gripped the markets.  Of course, the worst news for us comes from the fact cocoa was hit hard, dropping from $3,400 a ton in early December to just $2,820 in recent trading.

It seems unfair, but the abrupt downturn in cocoa was due to forced selling by leveraged investors searching for liquidity.  In other words, the commodities strong fundamentals simply weren’t enough to match the effects of forced deleveraging.

As you’re aware, our position in the iPath Bloomberg Cocoa $NIB was stopped out due to the unwelcome predicament.  $NIB crossed our $39.09 risk control line on January 6th.   As a result, this trade is now closed.

Given the current “risk off” sentiment towards softs, it’s best to steer clear of the entire complex for the time being.



The cattle markets have been subject to some pretty remarkable volatility as of late.  After sliding to new 18-month lows in early December, both live and feeder cattle rallied back to multi-month swing highs by the start of January.

What’s shaping up for cattle in 2016?

Due to the fact US producers are working diligently to bring cattle numbers back up after years of low inventory, it’s likely we’ve already seen the cyclical high in cattle prices.  Going forward, I expect both live and feeder cattle to remain volatile, but trend mildly lower as 2016 progresses.


Category: Commodity Trading