Commodity ETF Alert August 2009 Portfolio Update
August 25, 2009
What happens when the person you’re after isn’t who you thought they were?
Ever see the musical, Les Miserables? If you haven’t, I highly recommend you see it.
The musical is about a prisoner who breaks his parole and runs from the authorities. The prisoner, you learn, is a kindhearted soul and manages to help a number of people. Through the years, he’s doggedly followed by a police detective who thinks the escapee is nothing but scum.
After years chasing the escaped con, the detective learns of his good deeds. He realizes the man he’s been chasing all these years isn’t the scum he thought he was.
Why do I bring this up?
Because the CFTC is having a Les Miserables moment of their own.
In their haste to regulate and stop evil speculators from trading in the commodity markets, they targeted some Commodity ETFs. These ETFs aren’t controlled or owned by big hedge funds or evil traders… Nope… it’s the little investor who’s been using the ETFs.
In an effort to capture the big bad trader, the CFTC’s net caught the very people they’re trying to protect… the little investor like you and I.
Right now, Commodity ETFs hold an astonishing $59 billion in assets according to the Wall Street Journal.
The CFTC wants to limit trading positions.
Placing limits on the size of the ETFs trading in the commodity markets isn’t the answer. All that does is increase costs. It will also lead to a huge increase in the number of commodity ETFs out there. Think about it. If one fund hits the maximum size, what prevents a new fund from being created?
UNG, a Natural Gas ETF (I warned you to stay away from), has already limited the number of shares it will issue… and what’s happened? The fund is now trading out of whack with the underlying commodity. If you buy that fund, you’re paying a 15% premium over its assets.
Seems kind of silly to me.
Now, this news is directly impacting you! This month we issued a buy recommendation on Natural Gas… We suggested taking a position in the GAZ ETF. Just two days ago, Barclay’s, the ETF manager, announced they’d stop issuing new shares.
That means we might see this ETF start trading at a premium to the underlying commodity. It’s never good when we see a deviation in pricing. It hurts the market and impacts the investors in a negative way.
Right now there’s no need for concern. I’m watching the CFTC closely and as the rules change, we’ll give you an update.
Let’s take a look at our open positions…
Position Updates
. . . iPath DJ AIG Natural Gas TR Sub-Index ETN (GAZ) – Buy up to $17
This was our new trade in August. The commodity traded down a bit over the last two weeks. Everyone should have bought this at a great entry price. If you haven’t already, take a position in GAZ up to $17.
There is news about GAZ not issuing new shares. Pending CFTC regulations may limit the size of the fund and the amount of natural gas it can control. I’m watching this situation closely… but for now, we keep trading as planned.
. . . iPath Dow Jones AIG Nickel ETN (JJN) – SELL
In case you missed the last issue, we told everyone to SELL JJN. We hit our price target and it was time to book profits.
Nickel rallied hard in just the last few weeks giving us a gain of more than 48%!
. . . iShares COMEX Gold Trust (IAU) – Buy up to $96
Gold prices have been bouncing around quite a bit. I’m expecting them to rally on improving economic news (especially better unemployment numbers). This trade could get volatile in the next few months.
We’re trading below the buy up to price. If you haven’t already, go ahead and establish a position. Buy up to $96.
. . . iPath Dow Jones–AIG Livestock ETN (COW) – SELL
OK, this is ugly. I expected a rebound in pig prices. What we got was a slide further into the pig slop! Since we’re not getting the price movement we want, let’s exit this trade to conserve capital.
COW isn’t moving like we want it to. Sell COW now to conserve capital.
. . . iPath Dow Jones–AIG Copper ETN (JJC) – HOLD
Our Copper ETF made a new high yesterday. We’re now trading in the low $40s. Driving copper demand is China. Every time good economic news emerges from Asia, the commodity jumps higher.
We should see this ETF climb a bit more before hitting our price target. We’re up over 38% so far in the trade. Hold tight.
. . . iPath S&P GSCI Crude Oil Total Return ETN (OIL) – HOLD
Oil continues to slog its way higher… the last few points are proving the most difficult. Remember, our price target is $27 on the Oil ETF. We’re trading close to $25 right now so watch this trade.
Any positive news about the US economy could send oil prices up very quickly.
Action To Take
- Sell COW now to conserve capital
Category: Commodity Trading
