Commodity ETF Alert August 2012 Issue

| August 12, 2012 | 0 Comments


No doubt about it, the price performance of precious metals has been less than exhilarating in 2012.

It’s fair to say (compared to 2011 when they shot through the roof) precious metals have been an undeniably boring asset class this year.

Gold, silver, platinum, palladium… they’re all stuck in long and frustrating sideways trading patterns.

What’s going on?

Precious metals 2012 underperformance is primarily due to two factors…

First of all, the US Dollar kicked off a remarkably strong uptrend starting in August 2011.  And ever since the dollar’s rally began, precious metals have faced strong headwinds.

Of course, that makes perfect sense since metals generally trade with a strong inverse correlation to the dollar.  In other words, when the dollar rises, metals usually drop in value and vice versa.

What’s more, early 2011’s remarkable precious metals performance had investors sitting on spectacular gains.  And it’s those gains that investors used to raise cash levels in their portfolios in 2012.

In other words, precious metals are being used as a piggy bank for investors seeking liquidity.

But precious metal’s strong headwinds are about to change direction.  And this time the shift in prevailing economic winds will likely be in favor of precious metals. 

Let me explain…

It’s highly likely we’re seeing an intermediate-term top in the US Dollar right now.  With European optimism rising, there’s little catalyst for the dollar to continue higher through year-end.  This factor alone means metals are likely on the cusp of a late 2012 rally.

And there’s one metal in particular that’s presenting us with a fantastic buying opportunity this month.

Which metal am I talking about?

… Platinum.

As you may know, platinum is not only a precious metal, but it’s an industrial metal as well.  That’s due to the metal’s widespread use as an auto catalyst.  In fact, nearly 50% of world platinum production goes into this use alone.  Platinum’s unique chemical composition converts harmful exhaust fumes into harmless vapors.

But here’s the deal…

Due to the recent growth slowdown in economic powerhouses like the US, Europe, and China, the price of the industrial/precious metal has weakened dramatically.

In fact, platinum’s recent weakness has it trading at its biggest discount vs. gold in over 20 years.

Take a look…


As you can see, the price of platinum relative to that of gold is remarkably cheap right now.  In fact, platinum’s discount to gold reached $230 an ounce in recent weeks… an all time low. 

That’s a remarkable turn of the tide considering platinum’s traded at a premium to gold since the mid-1980s.  In fact, platinum’s average premium to gold over the past 25 years is around $190!

It’s clear, platinum is cheap on a relative basis right now…

And rest assured, the recent price weakness is causing some serious problems.

You see, nearly 80% of platinum production comes from a specific region of South Africa… the Bushveld complex.  The highly concentrated ore found in the area has made Bushveld one of the most profitable places on earth to mine platinum.

But with platinum prices at such depressed levels, mining companies operating in the Bushveld are now seeing heavy losses.  In fact, Eastplats Platinum Ltd. recently reported a wide quarterly loss thanks in part to lower platinum prices.

As a result, the company is forecasting a drop in production for the remainder of 2012 and all of 2013.  And rest assured, Eastplats isn’t the only miner taking this step.

But low platinum prices aren’t the only thing causing Bushveld production slowdowns…

The world’s third largest platinum miner, Lonmin, recently announced they’re shutting down all their mining operations in the Bushveld.  According to a company press release, competing trade unions are at odds and it’s leading to extreme violence at Lonmin’s facilities.

No doubt about it, when the world’s largest platinum miners are curtailing production, it can only mean one thing…

Platinum’s supply/demand curve will undoubtedly start tightening.  And when that happens, we’ll see the price of this essential metal start rising.

Let’s jump on board the platinum train now, before the inevitable supply/demand change occurs.  Because once it does, investors will be surprised at how quickly platinum rises- and they’ll be hard pressed to buy at a decent price.


Once again, we’re looking to the iPath DJ-UBS Platinum Total Return ETN (PGM) to get long the platinum market.  As you may know, we’ve used PGM in the past with good results.  This ETN is intended to reflect returns available through an unleveraged investment in platinum futures.



As you can see, it’s been a rough year for platinum.  But with the industrial/precious metal trading at important technical support levels, now’s the time to buy this undervalued commodity.

But just to be safe, let’s buy PGM with limited risk.  In other words, we’re setting a tight stop loss on this trade just in case we see another blowup of Europe’s debt crisis.  If PGM closes below $30.00 in coming months, we’ll close this trade for a small loss.


iPath DJ-UBS Platinum Subindex Total Return ETN (PGM) is trading at $31.63.
Buy PGM up to $32.00 per share.
Our profit target is $40.00 or more.

***Editor’s Note***  PGM is thinly traded.  Make sure you use limit orders when purchasing this ETN.  And whatever you do, do not ‘chase’ PGM over the maximum buy up to price of $32.00!

Commodity Review

Energy JJE $17.38 $16.46    +5.6%
Grains JJG $60.60 $57.87   +4.7%
Industrial Metals JJM $31.77 $32.80    -3.1%
Precious Metals JJP $85.48 $84.64   +1.0%
Softs JJS $58.74 $62.81   -6.5%
Livestock COW $28.29 $28.60   -1.1%
All Commodities DJP $42.13 $41.47   +1.6%


Growing optimism over Europe’s debt problems, along with a better than expected July employment report, sent crude galloping higher in recent trading.  In fact, oil’s back in the mid $90 a barrel range once again.

That has our position in the iPath S&P GSCI Crude Oil ETN (OIL) trading at a 10% gain from our entry.  Not bad considering many analysts thought oil would collapse to the mid $70s not long ago.

We may see crude prices rise over $100 a barrel in coming months, especially if the standoff with Iran escalates.  Let’s keep our position in OIL at a hold until further notice.

As far as natural gas goes, the seemingly abundant commodity is back below $3 mmBtu.  Long-range weather forecasts show temperatures cooling across the US in coming weeks.  Of course, that means US electricity demand will drop, reducing natural gas usage at power plants.

Don’t be surprised to see natural gas prices ease a bit further in coming weeks as we enter the late summer months.  But once we get into Fall and cooler temperatures arrive, we should see natural gas back above $3 and likely much higher.

Keep our position in UNL at a hold for now…


More gains for grains…

Ongoing drought conditions in the Midwestern US have corn, soybeans, and wheat trading near record highs.

As a matter of fact, corn traded at all-time highs of $8.43 a bushel last Friday.
The record-breaking rally came on the heels of a USDA report showing crop yield estimates dropping to 123 bushels per acre- a 17-year low.

The grains complex will likely stay elevated until we see the actual results of this year’s harvests.  However, I do not recommend being long any grain related ETFs at this point.

The easy gains have been made, and the odds of a steep selloff are growing by the day.


Copper remains stuck in the $3.30- $3.50 trading range thanks to data revealing industrial output grew at its slowest pace in three years.  Obviously, slowing industrial output is not indicative of higher copper prices.

But here’s the deal…

China also revealed consumer inflation hit a 30-month low last month.  And that means it’s highly likely we’ll see the Chinese government release some sort of economic stimulus in the near future.

Let’s keep our position in the iPath Copper ETN (JJC) at a hold as China appears ready to light a fire under their economy.

And what about palladium?

While the long-term fundamentals remain solidly bullish for the industrial/precious metal, it can’t seem to shake the grasp of the bears.  Palladium is still stuck trading just above the $575 technical support I mentioned in the last update.

Remember, if our position in the ETFS Physical Palladium Shares (PALL) closes below $54.00, we’re cutting this trade from the portfolio.  But until then, let’s keep PALL at a hold.


Gold is back above $1,600 in recent trading.  A weakening US Dollar, along with European optimism, has the yellow metal testing the top of its multi-month trading range.

Take a look…

Gold Chart

Gold needs a solid close above $1,640 in order to break out of its long summer slump. If it doesn’t close above that important technical level, the yellow metal may retest the recent trading channel lows of $1,540 (green line) in the near future.

Either way, let’s keep our gold position in the iShares Comex Gold Trust (IAU) at a buy.  A late 2012 rally is still highly likely as central banks turn on the printing press to stimulate their economies.

See this month’s trade alert for more information on precious metals…


Our cocoa trade is starting to shape up!

After a long wait, the iPath DJ-UBS Cocoa ETN (NIB) is now giving us slight gains. Growing South African weather worries sent cocoa from $2,200 a tonne a few weeks ago to $2,400 in recent trading.  And the best part is, if cocoa breaks through technical resistance at $2,450, we may see the big price rise we’ve been waiting for.

Let’s keep NIB at a hold for bigger gains ahead…

Cotton, coffee, and sugar haven’t fared nearly as well in recent trading.  In fact, all three soft commodities are down from their highs set a few weeks ago.  We may see another long opportunity in coming months for softs, but for now, let’s keep cocoa as our only long position.


Feeder cattle futures are on the defensive…

Record heat and drought conditions across much of the US sent feeder cattle into a tailspin in late June and July.  In fact, spot feeder cattle fell from just over $1.60 a pound in early June, to $1.41 as of last night’s close… a steep 12% drop.

We’ll likely see plenty more price uncertainty for cattle in coming months as ranchers in drought stricken US states have no choice but to cull their herds.  This culling activity leads to more supply in the short run, causing prices to drop.

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.