Commodity ETF Alert April 2013 Portfolio Update

| April 23, 2013


What The Heck Just Happened To Precious Metals?

As I’m sure you’re aware, precious metals have taken a severe beating in the past two weeks.  In fact, gold dropped to $1,350 an ounce on April 15th.  That’s a remarkable 15% drop from where the yellow metal opened April trading at $1,600.

No doubt about it, a $250 drop in a matter of weeks is very unusual…

As a matter of fact, gold’s one-day drop on April 15th was the metal’s worst selloff since the early 1980s.  Silver, platinum, and palladium followed suit with hefty losses of their own.

So what exactly happened?

Panic, fear, and most importantly, margin call selling overtook precious metals markets last week.  As you may know, a margin call occurs when the value of a margined investor’s account drops below minimum maintenance margin levels.

When an investor receives a margin call from their brokerage, he/she is forced to either deposit additional funds, or sell assets until minimum maintenance margin is within acceptable limits again.

Bottom line…

Once investors found their accounts deeply underwater last week, they had no choice but to sell anything and everything to get right with their brokerages.  Margin call selling turned what should have been a slight drop into a downright market collapse.

Gold, silver, platinum, palladium – they all got hammered.

Of course, the most important question now is, where will precious metals go from here?

That’s the hot topic I’ll be covering in our next monthly issue due out on May 14th… so be sure to tune in.

Until then, let’s take a look at our open positions…


Position Updates

. . . . iPath Pure Beta Cocoa (CHOC) – HOLD

Cocoa bulls are finally arriving!

The commodity is now trading just north of $2,300 a ton.  That’s up 13% from the early March lows of $2,050.  What’s more, cocoa is the 2nd strongest commodity performer over the past month behind natural gas (more on that in a minute).

Maybe you remember, I suggested in our February 2013 position update that CHOC was a buy at any price under $32.50.

If you bought at those levels, you’re now sitting on gains of at least 6% in CHOC.  Of course, our official buy price for CHOC is still $33.60.  So we’re officially sitting on a gain of 2.6% right now.

For now, let’s keep CHOC at a hold…

We may see a slight pullback for cocoa prices in coming weeks as short-term traders take profits on the recent move higher.  However, after that bout of selling clears, we should see cocoa resume its new upward trend.  Keep holding for higher prices!

. . . . ETFS Physical Palladium Shares (PALL) – HOLD

Unfortunately, palladium was dragged dramatically lower along with the price of gold last week.  I have no doubt that the margin call selling issue described above is the main reason for palladium’s downfall.

However, it really doesn’t matter what caused the selling… the fact is we’re sitting on a loss in PALL.

The question now is- do we hold this trade or cut our losses?

In most cases, I would recommend selling a trade that’s down 11% like PALL is for us right now.

However, the recent downfall in the price of palladium will be the metal’s own savior.  In other words, South African palladium miners will find it even tougher to produce the metal at a profit now that the price has dropped so severely.

Remember, 80% of global mined palladium supplies come out of South Africa.

We could very well hear news of additional mine closures in South Africa in coming months.  That means the supply situation for palladium will get worse before it gets better.

As a result, let’s keep PALL at a hold until further notice.

I’m hesitant to move PALL back to a buy until I know the smoke has cleared from the recent selloff.

Now let me be clear…

Palladium will likely remain very volatile in the weeks ahead.  That means we may see additional steep selloffs mixed with some equally dramatic rallies.  If you can’t stomach the ride, you should consider cutting your losses in PALL now.

But if you’re patient, you should see palladium prices rise strongly in the latter half of the year.

. . . . iPath DJ-UBS Sugar (SGG) – HOLD

Sugar held its ground at the $17.5 cent per pound level for the past few weeks.  In fact, most of the commodity’s April trading has gone through at the $0.175-$0.18 price area.

While that’s not the exciting rise in prices we’re looking for, it certainly beats the performance of a lot of other commodities in recent trading.  Oil, grains, precious and industrial metals- they’ve all seen steep price drops over the past month.

My point is, hiding out in sugar is turning out to be one of the safer plays in the commodity markets right now.

Let’s keep holding our ground in SGG…

Sugar is very cheap at these levels and the slightest positive shift in supply/demand fundamentals can send it higher in a hurry.

. . . . US 12 Month Natural Gas (UNL) – HOLD

Our natural gas trade is starting off just right…

While crude oil took a steep dive along with precious metals last week, natural gas bucked the bearish trend and surged to new highs.  In fact, the commodity rose to multi-year highs at $4.40 mmBtu last Thursday.

The recent rise is pushing our UNL trade solidly into the green.  As of today, we’re sitting on gains of 4%.

But the real excitement for natural gas bulls will come in a few months…

If temperatures are anywhere near the highs seen last summer, natural gas prices will likely test the $5 area in the latter half of the year.  There are simply not enough dry-gas rigs operating in the US to support rapidly surging natural gas demand.

Be patient with UNL and keep holding for higher prices!


Category: Commodity Trading