Commodity ETF Alert August 2010 Issue

| August 10, 2010 | 0 Comments


Remember the old term “having the best of both worlds”?

It’s when you get benefits from two different situations that normally don’t go together.

Something like…

Watching a movie with great comedic intervals, along with a superb dramatic ending… a real tear jerker.

You get a funny movie with a twist of heartwarming drama at the end… two things that normally don’t go together.

Of course, getting the best of both worlds is a great thing.  Instead of only getting one benefit, you get two.

And that’s exactly what we think this month’s investment will give us… the best of both worlds.

You see, we have two possible ‘worlds’ developing over the next year.

One world has a stable and growing economy…

In this world, unemployment falls and the economy starts growing again.  People are back to work and opening up their wallets.

They want to spend and the economy improves because of it.

It’s a world where the demand for commodities increases.  Companies need more basic materials to make the world go around.  Stuff like copper, oil, aluminum, and other industrial metals are always on the shopping list.

But the other ‘world’ is different…

This other world isn’t nearly as rosy as the first.  It’s a place of uncertainty… a world of fear.  As a result, companies aren’t willing to hire.  Unemployment remains high and people struggle to find jobs.

Of course, consumers won’t spend if they don’t have any money.  And if they aren’t spending, companies cut back production.  And that means less demand for the basic materials they need to make products.

In this other world, the demand for certain commodities falls… and prices follow.

Not exactly the world a commodity investor (or anybody) looks forward too.

But wouldn’t it be nice if there were a commodity with upside potential… no matter what the world economy does?

Platinum is one of those investments…

As long as you buy at correct levels, the upside potential for platinum is big.  And right now we have a great opportunity to buy platinum.

Platinum prices may turn out to be horribly inexpensive at current prices.  But I’ll get to more on that in a minute…

First, let’s look at the basics of platinum…

Platinum is part of the Platinum Group Metals (PGM).  PGM includes rhodium, osmium, iridium, ruthenium, palladium, and platinum.  All of these metals have their own specific uses.

But its platinum we’re interested in right now… and here’s why.

Platinum plays a dual role in the metals complex.  It’s a precious metal sought after for it rarity.  But it’s also an industrial metal with many uses in modern society.

Platinum is used widely in modern industry.  In fact, it’s estimated that 1 out of every 4 products is affected by platinum at some point in its production.

The biggest industrial application for platinum is for catalytic converters.  Nearly 50%of world platinum production goes into this use.  Catalytic converters are on the exhaust system of your car.  The unique chemical composition of platinum converts harmful exhaust fumes into 90% harmless vapors.

Over 95% of new cars and trucks worldwide are fitted with catalytic converters.

And that number is going to grow in the future…

Pollution is a global issue.  Any way you slice it, platinum will remain in high demand from the global automotive industry.

If the global economy continues to gain traction, auto sales will continue to flourish. And as long as auto sales remain strong, platinum demand will remain robust.

But catalytic converter demand is only a part of the picture…

Due to the “green energy” push, platinum is growing into another promising area… fuel cells.

Fuel cells are a part of the next generation of power.  These cells generate electric power from a chemical reaction.  Unlike a battery, which needs to be recharged, a fuel cell can run indefinitely when supplied with fuel.

A fuel like hydrogen…

By combining hydrogen and oxygen over a platinum catalyst, electric energy is produced.  And the best part is the emissions produced from this reaction are close to zero.

That’s right, emissions free energy may be just around the corner!

To be sure, platinum has many industrial uses.  Things like electronics, healthcare, and biotechnology all use platinum to varying degrees.

And this is the first reason we want to get into platinum.  It’s exposure to industrial demand.

If global economies continue to grow, industrial demand for platinum should send prices higher.  With so many uses for platinum, and new ones showing up, demand will be strong.

Platinum will be a great investment is this ‘world’ of a growing economy.

But remember, we also have the possibility of a different world…

This is a world of growing economic uncertainty… one where investors are afraid of soaring government deficits.  A world where unemployment remains high and interest rates are held at extremely low levels.

In this world, governments will print money to stimulate growth.  But as they run the presses, currency values fall.  Investors will look for ways to protect their wealth.  And in uncertain times, investors turn to precious metals.

And platinum is on top of many investors’ list…

But you better bring your checkbook.  At $1,550/ounce, platinum isn’t cheap.

Why the hefty price tag for platinum?

You see, even though platinum is widely used in industry… it’s also very rare.

There are only a few locations in the world where platinum is produced.  Places like Canada, Russia, and the state of Montana here in the U.S.

It’s a funny thing…

The amount of platinum produced in those areas is meager compared to South Africa. Nearly 80% of platinum production occurs in a specific region of South Africa.

This area is known as the Bushveld Complex and it contains some of the richest ore deposits on earth.

And here’s where it gets interesting for platinum…

According to platinum experts, miners in the Bushveld complex are facing difficulties. They’re having to dig deeper and deeper to pull out the metals.  High costs, along with other factors, are forcing mine closings.

As a result, platinum demand is expected to outstrip supply between 2010 and 2016.

That’s right, supply will not be able to meet demand in coming years.

When the main platinum supplier can’t raise production levels… well, I think you can figure out where prices might be heading.

And this is how platinum can give us the “best of both worlds”…

Both of the economic ‘worlds’ described above may lead to higher platinum prices.

Either we get a growing economy with higher industrial demand for platinum.  Or we get a weakening economy with investors pushing for wealth preservation.

The bottom line is this…

Platinum fundamentals will remain bullish no matter what the economy throws at us. This is one of the rarest metals on the planet.  With supply deficits seen in coming years, platinum prices have limited downside… and a large dose of upside potential.

Now, there is the possibility if economic news suddenly worsens, platinum may trade lower due to technical reasons.  If it does, we would use it as a buying opportunity.


The iPath DJ-UBS Platinum ETN (PGM) is an ETN reflecting the price of platinum. PGM tracks the Dow Jones-UBS Platinum Total Return Sub-Index.  This index reflects the returns potentially available through an unleveraged investment in the futures contracts on platinum.


Take a look at the chart…


As you can see, PGM is currently trading in the $36 to $38 range.  This is a great time to pick up shares of PGM.  Grab shares at $38 or lower.


iPath DJ-UBS Platinum Total Return (PGM) is trading at $36.62.
Buy PGM up to $38.00 per share.
Our profit target is $46.00.
Don’t forget your position sizing.

Commodity Review

Energy JJE $22.81 $21.90   4.2%
Grains JJG $41.18 $36.11    14%
Industrial Metals JJM $39.17 $34.54   13.4%
Precious Metals JJP $62.63 $62.67   -0.1%
Softs JJS $48.61 $46.05    5.6%
Livestock COW $29.43 $28.67   2.7%
All Commodities DJP $40.76 $37.83    7.7%


Crude oil popped back above the $80 mark in recent trading…

Strong earnings reports in recent weeks from bellwether companies sent oil higher.  A falling U.S. Dollar is also supporting oil prices.  The dollar has been dropping steadily since the European debt worries subsided a few weeks ago.

However, recent inventory reports shows crude remains well supplied in the U.S. Supplies at the Cushing hub in Oklahoma are rising, right along with gasoline supplies.

The supply/demand fundamentals don’t support a strong move higher in crude oil prices… yet.

But the recent price jump puts us back near out original buy point in OIL…

Despite the limited short term upside, we want to hang on to this position.  As you know, the long-term fundamentals for oil are incredibly bullish.

And let’s not forget, the situation with Iran is (unfortunately) growing more complex by the day. At some point, action is likely to be taken.

If and when this happens, crude prices will surge.  And we’ll be very glad we held onto this position.


The fundamentals in the grains market are changing dramatically.  Going into the spring there seemed to be ample supply of corn, soybeans, and wheat.

But that’s all changed now.  Recent reports from around the world show the grain markets are going to be much tighter than investors thought.

And the big news is out of Russia…

The country is in the midst of a drought and they just recently banned all exports of grain.  It’s a temporary ban but the news was enough to set the grain markets on fire.

Wheat is the focus of the ban and prices shot through the roof last week.  At one point, the wheat market was “limit up”.  This means the market had reached the maximum upside for a daily move.

But other grains are shooting higher as well…

Soybeans and corn are also experiencing big upward price moves.  The fundamentals did a complete 180-degree turn from early spring when prices were falling through the floor.

We’re looking to get back into grains in the future but we can’t do it here.  Prices have risen so dramatically we risk buying the highs in the market, which we don’t want to do.

Let’s wait for the markets to settle down a bit.  Once it does, we’ll find a way to profit.


Industrial metals have seen a bit of a bounce in recent weeks as earnings reports eased fears of a weakening global economy.

However, the potential for further upside in metals like copper, aluminum, nickel, and lead are limited.  There’s still just too much uncertainty out there for a big short-term move higher in these metals.

At some point we’re going to get back into industrial metals, but not yet.

However, our new position in platinum falls into two categories… industrial and precious metals.

And now is a good time to get exposure to platinum.  As you learned earlier, there are two catalysts for higher platinum prices.  Make sure you get your shares of PGM now.


Gold is back up to the $1,200 area…

After falling to $1,160 a couple of weeks ago, prices are rebounding as investors use the weakness as a buying opportunity.  We expect to see further volatility in gold prices in the coming months.

With the fears of European insolvency on the back burner (for now), gold prices need another catalyst to head higher.  And the Indian buying season is just what the gold market needs.

Countries like India hold gold in high regard…

Demand increases during the Indian festival season.  The season runs from the end of August to November.  It’s a seasonal pattern to support a bullish argument for gold in coming months.

Not only that, but recent job reports in the U.S. remain weak.  This weakness puts pressure on the U.S. Dollar, which in turn strengthens gold.

Silver remains in tight range bound trading between $17.00 and $18.00…

We’re still in our silver position (SLV) and for good reason.  We expect silver prices to trade much higher in the future.  But some patience will be required, as the ultimate catalyst for higher metals prices still awaits… inflation.

We’ve yet to see inflation, even though the Fed has printed a massive amount of money.  But just wait, the ultimate day of reckoning is approaching.

We suspect massive inflation to rear its ugly head at some point.  And when it does, you’ll be very glad you own gold and silver.


Sugar has really been on a roll recently…

Our position in sugar (SGG) is currently up 21%.  We got a great entry in sugar and we’re positioned nicely for higher prices.  But before sugar prices head higher, they may fall in the near term.

Prices became technically overbought in recent trading as prices surged.  This was due to Brazil having problems getting sugar to their shipping ports.

Keep holding our sugar position for higher prices in the long term…

Cocoa is still volatile as we head into the end of summer.  Prices are trading in a wide and volatile range.  But we see cocoa prices heading higher as we move into the end of 2010.

Remember, we’re expecting a shortfall in cocoa supply going into the fall just as candy makers buy up cocoa for the holiday chocolate season.

Keep holding your position in cocoa (NIB), and buy below $45.50 if you haven’t already…


Cattle prices remain resilient as prices hold lofty levels.  Feeder cattle had a nice run in recent months.  The number of cattle on feed fell from last year’s levels by over 1%.  This in turn sent prices higher for feeder cattle.

But now this trend should come to an end.  The late summer heat drops consumer demand for beef.  We’re also expecting a large number of cattle to come to market as producers take advantage of the higher prices we’re seeing now.

Once the supply comes back into the market, prices should fall.

Portfolio Changes

  • This month we’re adding platinum (PGM) to the portfolio.  See above for all the details.

Category: Commodity Trading

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.