Commodity ETF Alert August 2014 Portfolio Update
PATIENCE PAYS WITH PLATINUM…
As you know, I sent out an email on August 7th, alerting you to the buying opportunity in the ETFS Physical Platinum Shares (PPLT).
Here’s additional insight into why we made this trade, and how it’s performing thus far.
———————————————————————————————————————————–
No doubt about it, times are tough for the platinum mining industry.
As I mentioned in our trade alert a few weeks ago, Anglo American is selling a sizable portion of their South African mine holdings.
With platinum prices depressed and operating costs running near all-time highs, the company is dumping underperforming assets.
As you may remember, Anglo is the world’s largest platinum miner.
But it turns out Anglo isn’t the only one cutting back…
Rumor is spreading quickly that Lonmin, another large South African platinum producer, is on the verge of closing 6 of its 11 mining shafts.
Why?
The company reached an agreement with its workers in late June, which allows for wage increases of 20% per year over the next three years.
According to various sources, the only way Lonmin can afford the wage increase is to close its weakest performing mine shafts.
We’re starting to see a trend here…
The world’s biggest platinum miners are restructuring their businesses to reflect low platinum prices and increasing operating costs. With shafts getting closed left, right, and center, global platinum supplies can only suffer.
But that’s not all…
The looming cuts at Lonmin will slash around 5,700 jobs from their workforce. In case you’re unaware, the Association of Mineworkers and Construction Union (AMCU) was one of the leaders in the 5-month strike in early 2014.
Even though the AMCU came to an agreement with Lonmin in June, they will not be happy with huge job cuts. As a result, there’s a good chance South African labor unrest rears its ugly head again.
No matter how you slice it, the supply situation for platinum is growing more bullish by the day.
What about demand?
Unfortunately, European recession fears are rising. Recent GDP data revealed the Germany economy actually shrank in the second quarter of 2014. Since Germany is the growth engine of the Eurozone economy, many are wondering if the whole region is about to drift into recession.
Here’s the deal…
Europe’s automobile fleet is largely dependent on platinum for their catalytic converter needs. A European recession would hinder car sales, and therefore platinum demand.
If a European recession comes to fruition, it’s not out of the realm of possibility to see platinum bleed lower. Investors are already reacting to the recession possibility by pushing the commodity to multi-month lows at $1,420 an ounce.
However, lower platinum prices will only make the South African mining situation worse.
Producers will be hard pressed to turn a profit unless they slash production at marginal shafts.
Bottom line…
The lower platinum prices go, the further global platinum supply will likely fall. As a result, a global supply crunch is virtually guaranteed at some point down the road.
That’s why we’re keeping the ETFS Physical Platinum Shares (PPLT) at a buy in the portfolio.
Now keep in mind, PPLT is a rather high-priced ETF. As a result, it’s accustomed to rather big price swings. So whatever you do, don’t take too large of a position in PPLT just yet.
If platinum prices decline on European recession fears, you don’t want to be forced into hefty losses.
Instead, ease into PPLT gradually. You should be comfortable with adding to your bullish PPLT position if the metal drops to 52-week lows at $1,320 an ounce.
Folks, this is a trade where patience will pay!
PPLT is currently trading at $137.85 a share, which is below our original maximum buy-up-to-price of $143.84. If you haven’t already, go ahead and buy PPLT at any price under $140.00.
Commodity Review
| COMMODITY | TICKER | CURRENT VALUE | LAST MONTH | CHANGE |
| Energy | JJE | $17.68 | $18.30 | -3.4% |
| Grains | JJG | $38.04 | $38.86 | -2.1% |
| Industrial Metals | JJM | $31.63 | $31.49 | +0.4% |
| Precious Metals | JJP | $63.05 | $66.41 | -5.1% |
| Softs | JJS | $45.35 | $47.04 | -3.6% |
| Livestock | COW | $29.24 | $32.55 | -10.2% |
| All Commodities | DJP | $36.46 | $37.79 | -3.5% |
ENERGY COMMODITIES
No doubt about it, oil has taken quite a beating over the past month. West Texas Intermediate (WTI) crude dropped from $103 a barrel in mid-July down to $93 in recent trading.
A potential European economic slowdown and quickly growing US production had bulls running for the hills in recent trading. Thankfully, we set a tight stop below our position in the US Oil Fund (USO) last month to limit our risk. As you’re likely aware, the oil tracking ETF plummeted from our $37.65 stop order all the way down to $34.75.
Since we’re out of USO for a small loss, I’m looking for the next low-risk opportunity in crude.
As far as natural gas goes…
The NOAA is forecasting hot temperatures for the Central and Eastern US next week. As a result, we’ll likely see some bullish EIA inventory reports coming our way. As you’re likely aware, small inventory builds are just what natural gas bulls need in the current market environment.
And listen to this…
Natural gas is entering a seasonally strong time of year. The commodity has rallied in the September to late October time period 20 out of the past 30 years. Those are pretty reliable odds. Especially when you consider current inventories are still 16% below last year and 17% short of the 5-year average.
If you haven’t already, buy UNG at any price under $22.00.
GRAIN COMMODITIES
Other than a few short covering rallies over the past few weeks, there’s absolutely nothing exciting about grains right now. Corn is crossing the tape at $3.67 a bushel, while soybeans and wheat are trading at $10.28 and $5.55 respectively.
All three commodities are now trading at multi-year lows…
In spite of the relatively cheap prices, there’s simply no reason to be long grains right now. Unless the USDA is drastically overestimating this year’s harvest (which is not likely), corn, wheat, and soybeans will likely bleed lower.
INDUSTRIAL METALS
After a quick drop to the $3.10 a pound level last week, copper is back on the upswing. The red metal is currently trading at $3.22, which is just shy of the important technical resistance trend line I pointed out in last month’s update.
What has copper rebounding so nicely?
Increasing confidence in the US economy, along with a looming uptick in Chinese demand, has investors grabbing the red metal while it’s still relatively cheap. If copper can break above $3.30 on strong volume, we’ll likely see a strong run up into year-end.
If you haven’t already, go ahead and buy the iPath DJ-UBS Copper (JJC) at any price under $39.80.
PRECIOUS METALS
Unfortunately, gold and silver’s strong June rally has given way to selling. Gold is once again under $1,300 an ounce while silver is nearing 52-week lows at $18.75.
What gives?
The US Dollar is soaring to new 2014 highs thanks to hawkish language from the Federal Reserve. Multiple Fed governors have recently stated interest rates will likely start rising in the first quarter of 2015. With interest rates on the cusp of an uptick, investors are piling into the dollar.
As you may be aware, precious metals trade inversely to the dollar. In other words, when the dollar goes up, precious metals generally trade lower.
So what do we do now?
Even though the iShares Silver Trust (SLV) and iShares COMEX Gold Trust (IAU) are back below our maximum buy price, let’s keep these ETFs at a hold. We need to see how much steam is in this US Dollar rally before we really load our portfolios with SLV and IAU.
What about palladium?
Believe it or not, palladium traded at the $900 an ounce level on August 18th. The last time the industrial/precious metal traded at this important threshold was in 2001!
The recent rally sent the ETFS Physical Palladium Shares (PALL) rallying to $87.61, which is an 18% gain from our official entry price of $74.37.
What do we do from here?
With the technical uptrend in palladium firmly intact, there’s really no reason to sell the metal just yet. I realize it’s tempting to lock in these hefty gains in PALL, but there’s a very good chance of palladium surpassing, and holding above $900 an ounce by the end of this year.
Let’s keep holding PALL for higher prices!
SOFTS
Cocoa jumped to a new 52-week high at $3,269 a ton in recent trading. The recent rally sent the iPath DJ-UBS Cocoa (NIB) up to $42.95 on August 18th. That’s a solid 9% gain from our $39.41 buy in price.
Given the strong uptrend, it’s likely the commodity continues higher to the $3,400 area in coming months. Remember, the holiday season is right around the corner, which is when cocoa demand is strongest.
Let’s keep holding NIB for higher prices!
What about coffee?
The luscious bean surged to $2 a pound in late July after Brazilian harvest reports revealed the early 2014 drought damage is as bad as previously thought. What’s more, coffee growers in Central America are struggling with a leaf rust outbreak that’s cutting yields across the region.
Thanks to these recent bullish developments, it’s highly likely coffee tests the $2.19 yearly high in coming months. The recent run-up in coffee has pushed the iPath Pure Beta Coffee (CAFE) beyond our maximum buy price of $22.50.
As a result, CAFE is now sitting at a hold in our portfolio.
LIVESTOCK
Lean hogs suffered a sharp 30% drop after Russia banned food imports into their country a few weeks ago. The commodity plummeted from $1.33 a pound in early July to $0.91 last Thursday.
Adding bearish pressure to the situation is the fact pork is entering a seasonally weak demand period. Now that the summer grilling season is drawing to a close, pork demand is set to dwindle.
Category: Commodity Trading
