Commodity ETF Alert August 2010 Portfolio Update

August 24, 2010

Commodity markets are on a wild ride.

We’ve seen a major rally and major sell off in just the month of August.  So why all the volatility?

As usual with commodities, it’s complicated.

On one hand, there are macroeconomic factors affecting the commodities market as a whole.  The value of the U.S. Dollar, interest rates, the jobless rate, deflation concerns, and even inflation concerns are just a few of the major economic forces at work.

On the other hand, each commodity has its own fundamental factors at work.  Individual prices move on commodity specific supply and demand factors.

Let me give you an example…

Wheat prices have been all over the place lately.  And both macro and individual factors are driving the price movement.

From a big picture perspective, the global economic growth is slowing.  In times like these, consumers tend to cut spending.  Yes, people still buy bread.  But they tend to buy less or cheaper bread than they would in better times.

In theory, this should push down the price of wheat… except it didn’t.

In fact, wheat prices skyrocketed higher.

Why?  Because Russia experienced one of the worst droughts in recent history.  And Russia is a major exporter of wheat.

With the threat of a serious shortage of wheat exports, prices took off.

It’s a perfect example of how competing factors can move commodities.  Sometimes the fundamentals of a commodity move the price.  And other times, the market moves based on the big picture situation.

What about our portfolio?

We own products like gold and oil which tend to move on macro conditions.  And then we’re holding commodities such as sugar and cocoa.  They’re often heavily influenced by their own supply and demand dynamics.

In either case, we’re in good shape.  Our positions can benefit from both scenarios.

Now let’s take a closer look at our holdings…

Position Updates

. . . . iPath DJ-UBS Platinum ETN (PGM) – Buy up to $38

Our most recent trade is holding steady.  PGM settled in around our entry level and hasn’t done much since.

Don’t worry.  We love the upside in platinum.

Precious metals are on the rise.  Fears of a double-dip recession are once again in full swing.  Investors are pouring into gold and silver as the equity markets tumble.

It’s just a matter of time before the fear trade pushes platinum higher as well.

Remember, platinum serves as a precious metal and an industrial metal.

Right now, precious metals are seeing an increase because of economic concerns.  But as the economy improves, industrials will start getting the attention.

Either way, we’re in good shape with platinum…

If you haven’t purchased PGM yet, grab it before it trades out of our buying range.

. . . . iPath S&P GSCI Crude Oil Total Return ETN (OIL) – HOLD

Crude oil is pulling back a bit lately.  It’s trading at the lower end of its recent $70 to $80 range.

Not to worry.  It shouldn’t go much lower.

The fundamentals for owning oil haven’t changed.  Although the media isn’t talking about it, the economy is actually improving.  The improvements are small and don’t make the headlines.  But as the recovery gains traction, oil prices will be poised for a big increase.

But that’s not all…

The financial markets have been volatile in recent weeks.  Investors don’t know where to put their money.  They’re looking for liquid, safe investments.

Like U.S. Treasury bonds, gold… and oil.

Smart investors realize the only realistic long-term direction for oil is up.  And their money will keep a floor on the price of crude.

Oil is trading down a bit recently because inventories have been higher than expected. Additionally, poor economic conditions tend to keep a lid on oil prices.

But this is just short-term noise.

As the economy improves and inventories decline, look for higher oil prices.

Let’s hold onto our position in OIL.

. . . . iShares COMEX Gold Trust (IAU) – HOLD

Gold is once again trading near record highs.  The flight to safety is alive and kicking.

Economic news continues to disappoint.  And investors are heading back to the precious metal in droves.  As always, gold’s a safe place to be in times of major economic uncertainty.

And don’t forget… gold’s also a good place to be as the economy improves.

Sooner or later, all the cash being printed by the central banks will cause inflation.  When inflation starts to take hold, gold prices should increase as well.

Gold’s been a nice investment for us.  And it still has plenty of room to increase.

Hang onto IAU for more upside.

. . . . iShares Silver Trust (SLV) – HOLD

Silver’s getting a nice bump along with gold.

Precious metals are getting a big lift across the board with the widespread fears of a double dip recession.

Silver has been trading in a narrow range after going through a period of volatility.  But, it never closed below the 200-day moving average.  What’s more, it’s gotten a bump higher each time it’s approached this key level.

Today’s bounce off the 200-day average is no different.  In fact, this big jump is a great sign for our position in SLV.  It’s up over 2% in one day.

Just like gold, we expect big things from silver in coming weeks.  Hold onto your SLV position for now.

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

Sugar is flying high!

Since we bought SGG, it’s gone up a whopping $15.  That’s 38%!

In this tough market, those gains are stellar.  But the fundamentals have started to shift. In fact, it’s time to take our money off the table and book the profits.

On the supply side, India just announced it may end its ban on sugar exports when it expires this September.

This additional supply could easily drive prices down.

Also, heavy selling in the equity markets could dampen global demand for commodities such as sugar.  This may put further downward pressure on the price.

Finally, technically speaking, SGG is approaching its 200-day moving average.  This key resistance level is likely to cap our upside in the short-term.

It’s been a great run, but it’s time to sell our shares of SGG.  Congratulations on a big winner!

. . . . iPath DJ-UBS Cocoa ETN (NIB) – Buy up to $45.50

Cocoa is seeing its share of volatility.  But don’t let it worry you.

The fundamentals are still in our favor.

NIB pulled back recently on crop reports from the Ivory Coast.  They’re predicting the cocoa crop to be better than expected.

But, the weather situation still looks worrisome.  Farmers are still concerned about heavy rainfall and lack of sun.  The reports of a better than expected inventory seem to be jumping the gun.

In fact, NIB has bounced off its lows.  We also have a lot of support at these levels.

Grab shares of NIB while it’s at these prices.  It may not stay down here for long.

Category: Commodity Trading