Commodity ETF Alert December 2010 Portfolio Update

December 28, 2010

A historic year for commodities is almost in the books.  Several commodities have seen price increases of epic proportions.  And overall, commodities are justifying their place as a fixture in a diversified investment portfolio.

Here’s the real question…

What’s in store for 2011?

2010’s stellar run in commodities resulted from a combination of macro trends and non-recurring system shocks.  For example, we saw the impact of the lower dollar on nearly all commodity prices.  And we saw how a historically bad drought in Russia affected grain prices.

Here’s what I think… the macro trends will continue to support commodities in 2011, but it’s impossible to predict system shocks like extreme weather.

So what does that mean?

Well, we can’t predict the weather… but let’s take a closer look at the macroeconomic landscape.

First off, I feel pretty confident the one thing we’ll continue to see in 2011 is soaring demand for commodities in Asia.  The economy in China and India is growing like crazy. They’re going to need food, supplies, building materials, and energy… and the growth isn’t slowing down anytime soon.

And that’s not all…

Domestic demand for commodities should also be on the rise.  The economy is getting stronger.  Once the employment numbers start to improve, demand for certain commodities is sure to take off.  Oil is a good example of a commodity which will be in heavy demand once several million more people start driving to work.

On the flip side, there’s inflation to worry about.  If the world starts seeing more inflation, it could put a damper on commodity prices.  China’s already raised rates twice in recent weeks to battle back inflation.  And emerging markets like China are acting quickly to keep inflation from getting too high.

On the other hand, the U.S. – and especially Europe – don’t seem to be in danger of inflation anytime soon.

Finally, there’s the supply side.

Are we going to see more wild weather events create havoc in certain commodities markets?  Well, there’s always something… but we probably won’t experience the random craziness which took place this year.  It was truly an outlier year for harsh weather.

Here’s the bottom line…

From a macroeconomic perspective, demand for commodities should remain high in 2011. Inflation looks like it will be under control as well.  Although we probably won’t see all the crazy weather we had in 2010, high demand should more than make up for the unexpected supply shocks of this year.

In other words, I think commodities are poised for another big year in 2011.

Now on to the position updates…

Position Updates

. . . . iPath Dow Jones-UBS Copper ETN (JJC) – Buy up to $58.00

JJC is off to a nice start.  Although the price of copper is at record highs, it hasn’t stopped investors from gobbling up more of the industrial metal.

The fundamentals for copper are very bullish.  While copper stock supplies have risen recently, the high demand for copper should deplete any excess inventories.  When that happens, expect the price of copper to jump.

Remember, copper is one of the building blocks for an expanding economy.  And countries like China, India, and Brazil are experiencing high levels of growth right now.  They’re going to need lots of copper for the foreseeable future.

If you haven’t done so, buy shares of JJC up to $58.00 a share.  2011 is going to be a great year for copper.

. . . . iPath Dow Jones–UBS Livestock ETN (COW) – HOLD

Our COW position is climbing to new highs.  After a slow start, we’re starting to see livestock make its move.

Live cattle futures are up 4% over the last month and continue to approach record highs. In fact, I expect to see all-time highs any day now.  And that’s just the start.

South Korea is dealing with an extremely harsh case of foot-and-mouth disease.  They’ll have to cull over 300,000 cattle.  That means supply is going to take a hit in a market where demand is already soaring.

And that’s not all…

Lean hog futures have finally started making their move higher.  They’re up 12% over the last month.  And unlike cattle, hogs still have a ways to go to reach record highs.

All in all, the livestock market is set up to climb even higher.

We’ve climbed above our buy up to price, so I’m moving COW to Hold.  Hang onto your shares for bigger gains ahead.

. . . . United States Heating Oil Fund (UHN) – HOLD

The cold of winter has arrived in force.  The country is getting bombarded by massive storms and freezing temperatures.

And as expected, our position in UHN is hitting new highs.

We’re up 10% in heating oil so far.  And, it can go much higher if the bad weather continues.  Keep in mind, winter is just getting started.

With crude oil moving higher and winter weather settling in, I think UHN is in good shape to keep climbing.

Let’s continue to hold onto our position in heating oil.

. . . . iPath DJ-UBS Grains ETN (JJG) – SELL

Grain prices are climbing back to their highs.  In fact, our JJG position is sitting right around its peak level.

And that makes it the perfect time to sell.

We’re locking in over a 20% gain in grains.  That’s a very solid return.  More importantly, the fundamentals are changing and I want to make sure we get out for maximum gains.

Corn and wheat are both reaching extremely overbought levels.  What’s more, inflation concerns in China are putting a ceiling on grain prices for the time being.

Bottom line… we could see a selloff in grains very soon.

Longer-term, I’m still bullish on grains.  We may very well jump back in to JJG in the near future.  But for now, let’s lock in our profits.

Sell your shares in JJG and collect your 20% gains!

. . . . iPath DJ-UBS Platinum ETN (PGM) – HOLD

Platinum is holding its own.  We’re sitting on gains of around 12% in PGM.  And platinum is up roughly 7% over the past month.

I think PGM has great upside potential.  Unlike gold, we aren’t anywhere near record high platinum prices.  Of the major precious metals, it has the most to gain.

What’s more, precious metals are still a safe place to put your money.  With concern over inflation in China rearing its ugly head, investors are once again flocking to gold, silver, and platinum.

Bottom line, platinum is a safe investment with high upside.  What else could you ask for?

Let’s hold on to our PGM shares for bigger gains.

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

At long last, cocoa is finally in play.  And our position in NIB is back in the black.

For awhile now, we’ve been talking about the political unrest in the Ivory Coast.  Well, it’s finally exploded into a full blown crisis.  The country is on the brink of civil war.  Unless the incumbent president steps down peacefully, the new regime will be forced to take military action.

It’s not a pretty situation and it adds extreme uncertainty to the cocoa shipping industry. Until this conflict is resolved, there’s no guarantee cocoa shipments will continue on schedule.

And that means prices should continue to climb.

I’m going to keep a close eye on the news from the Ivory Coast.  For now, the situation is volatile… and bullish for cocoa prices.  And it’s not too late to grab your shares of NIB.

If you haven’t done so, buy NIB at these levels.  We could be on the verge of a big climb.

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

Crude oil is setting up for a big 2011.  Barrel prices are already over $90.  And it could just be the tip of the iceberg.

The global economy is looking strong heading into 2011.  And a growing economy can only mean higher oil prices.

Our OIL position is in the black and looks to be headed higher.

Let’s continue holding our position in OIL.  I see big gains ahead.

Action To Take

• Sell iPath DJ-UBS Grains ETN (JJG)
• Move iPath Dow Jones–UBS Livestock ETN (COW) from Buy to Hold

Category: Commodity Trading