Commodity ETF Alert April 2009 Issue

You really don’t need me to tell you.  Confusion is running amuck these days.

In early March, we put in a new low on the Dow and the S&P 500.  The S&P number was quite disturbing, we hit 666.

I’m not a big believer in superstitions or the super natural, but still, the “sign of the beast” runs shivers up my spine!

So, is this recent rally the real thing?

Are we really in a bull market, or is this a bear market head-fake?

Who knows?  I think it’s likely we see a pullback at some point in the next few weeks. When?  I don’t really know… but when it happens it will be quite dramatic.

While that sounds a bit negative, I am seeing small signs the economy is improving.

And that brings me to this month’s pick.

Copper!

This metal has played an important role in the history of mankind.  Much more than many people realize.

Throughout the course of history, Copper’s been a constant companion.  Early estimates put our first use of copper somewhere near 5,000 BC… if not farther back.

Copper smelting by our ancestors quickly followed.  Eventually copper found a use as an alloy.  When mixed with tin, the compound metal is called bronze.  It was widely used in tools, armor, and weapons.  It was even used for decorative purposes.  This lead to an entire era called the Bronze Age.

I could go on and on about the history of copper… but let’s jump forward to the present day.

And let’s talk about how to make money with this metal.

Let’s start with demand.

Just last month in our sector update section, we mentioned copper prices are falling due to anemic growth expectations.  Now, because of a recent rally in the equity market, optimism is renewed for a second half recovery.

And, with a recovery, we get increasing copper demand.

Copper’s use is widespread.  It’s found in everything from plumbing and electrical systems to household appliances and electronics.  Copper is used as a decorative product as well as a roofing material.  It’s even widely used in kitchen cookware.

China is one of the largest (and fastest growing) consumers of copper.  With a growing middle class, comes demand for new products… many containing copper. Remember, while the US market may be in a recession, China is still growing.  And they have an unquenchable thirst for the metal.

China accounts for 23% of world copper demand.

Copper’s widely used in new home construction.  While that industry’s been in the dumps lately, a rebound in activity (or the hint of a rebound) could drive prices significantly higher.

The supply side is a little different.

Most of the world’s copper supply comes from Chile.  The United States and Peru follow in a distant second and third place.  A few major copper producers include Freeport McMoRan (FCX), Rio Tinto (RIO), and BHP Billiton (BHP).

While supply is plentiful, production is slowing.  Recently, the Journal ran a piece about copper mines in Africa closing down.  In late March, two copper producers in Peru cut back production levels.

So we have a perfect storm brewing.  Demand expectations are starting to rise while production is falling.  Rising copper prices can’t be far behind.

Another interesting note… copper producer stocks are jumping along with the commodity.  This may be a sign that the recent jump in prices is the real deal.

ALL ABOUT COPPER

Copper prices are moving higher.  It’s a great new trend.  Now’s the perfect time to get in early.  I want to do this with the iPath Dow Jones–AIG Copper ETN (JJC).

Remember, this ETN is issued by Barclays and tracks the value of copper futures contracts.  Because of tracking errors, expenses, and a myriad of other reasons, the actual value of the ETF might be slightly different than the commodity.  It’s not a cause for concern, but important to point out.

Right now, JJC is trading at $29.22.  As you’ll see in the chart below, JJC has had quite a run.  Don’t let that scare you off.  I believe it has a lot higher to go.

TECHNICALLY SPEAKING

Copper started trending higher in early March.  That’s when we had a 5- and 20-day moving average cross to the upside. The 50-day has clearly started shifting higher. This is a great trend for us to follow.  The 200-day is still in a downtrend, but once we cross above that level, it’ll provide a nice level of support.

I’m sure you realize this is a momentum trade.  Clearly, copper has jumped from recent lows. I think it has a lot further to run.

The copper ETN could move back into the low $40s where it traded late last year.

I’d like to accumulate on a pullback.  However, we might not see a pullback for a while.  Get your position set up early and we’ll look for more positive fundamental news over the summer.

 

The iPath Dow Jones–AIG Copper ETN (JJC) is trading at $29.22.
Buy JJC up to $35.00 per share.
Our Profit Target is $45.50.
Don’t forget your position sizing.

ENERGY COMMODITIES

Energy prices jumped in late March… no doubt driven by activities in Venezuela. President (Dictator?) Chavez has orchestrated a takeover of the ports… is the oil infrastructure next?

We’re also seeing demand for gasoline move higher (slightly)… and expectations are for a driving summer vacation.  AAA is expecting average gasoline prices to range between $2 and $2.50 a gallon.  Personally, with oil prices climbing (over $50!) and driving season approaching, I think gas prices could hit the low $3 level.

In China, the government increased gasoline prices by 3% to 5%.  The kneejerk reaction is for demand to fall, but that won’t last long.  Once government stimulus kicks in, China’s demand will start climbing again.

Oil prices are up.  Our oil trade is working really well.  Everyone should have a nice profit so far.  We’re up 11%.

GRAIN COMMODITIES

We’ve managed to jump onto the Grain complex at just the right time.  Our trade is up more than 10% in less than a month.  We’re sitting on a nice little profit.  A few days after our trade alert, the Journal had an article titled “Farmers to Plant Less”.  The concerns over planting season are now cropping up (sorry, I couldn’t resist the pun)! Grain prices should continue moving higher into the summer season.

INDUSTRIAL METALS

After falling throughout the early part of the year, Industrial Metals were the big gainers this month.  The rebounding equity market is driving excitement over a recovery… and that could lead to more demand.

Copper, one of the key components, is up big.  We’re taking a position to profit from a continued move higher.  See page one for more details.

PRECIOUS METALS

Precious Metals was the only losing commodity complex this month.  They gave up more than 6%.  After a few months of big gains,  Precious Metals – lead by gold –retreated.  Part of it was profit taking no doubt.  Also contributing is a calming of fears.  The talk of a total economic collapse have been put to bed.  As a result, some of the precious metals are selling off.

Talk of the IMF selling off a chunk of their gold hoard hasn’t helped either.  Fears of $60 billion in new gold supply being dumped on the markets helped push prices lower.

I don’t expect this to last long… once inflation starts to become a concern, gold prices (and most other precious metals) should rise significantly.  I’m looking for a good re-entry point.

SOFTS

Interesting news for the Softs this month.  China is boosting their sugar reserve from 1.6 million to 2.8 million tons.  This sugar hoarding is following similar action by the Chinese in markets like oil and grains.  The mere thought of big buying like this will put a substantial floor under prices for some time.

LIVESTOCK

Livestock climbed slightly this month, up about 4%.  Demand is expected to remain weak for some time as the recession unwinds.  However, we are entering the summer season… a time of higher consumption.  This is one area to watch.

• This month we’re adding Copper (JJC) to the portfolio.
• We’re moving the Grains (JJG) to a “Hold”.  Its jumped above our buy-up-to price.

Category: Commodity Trading