Commodity ETF Alert December 2011 Issue

| December 13, 2011 | 0 Comments



Whew… what a month!

As you know, financial markets across the board have been stuck in a chokehold of European uncertainty since mid-summer.

November was more of the same. Commodity markets took investors for another roller coaster ride as the Eurozone debt crisis played out.

The volatility is hard to escape…

It doesn’t matter if you’ve been invested in stocks or commodities… the past few months have likely subjected you to wild market swings.

But now the storm clouds may be starting to clear…

Given current information, markets should start settling down a bit in coming days.

Instead of trading solely on European headlines, economic fundamentals will likely start coming back into focus.


The immediate threat of sovereign insolvency in Spain and Italy is diminishing.  Bond yields in these highly indebted countries are pulling back from record highs reached just a few weeks ago.

Trust me, that’s a big relief for investors the world over!

What’s more, European Union (EU) leaders met in a very important summit late last week.  They got together to hammer out details of a new European treaty.  The treaty is expected to place more fiscal discipline on EU member countries.

While the long-term effectiveness of the EU treaty remains to be seen, the fact that politicians are making progress is encouraging.  Hopefully they finally realize the urgency of the situation.

What’s this mean for commodities?

As long as there’s not another big blowup in Europe in coming weeks (and I’m not expecting one), specific commodities should start seeing the bulls come to play.  As a result, it’s the perfect time to purchase oversold commodities with bullish fundamentals.

But we have to be very picky.

There are plenty of commodities trading well below their yearly highs.  But only a specific few have bullish underlying fundamentals capable of leading us to profits in 2012.

One of them is palladium…

I’m sure many of you remember our trade in palladium from earlier this year.  We sat on solid gains in this industrial/precious metal for months.  At the time, we were looking for prices to continue rising due to the metal’s bullish fundamentals.

But then the European sovereign debt crisis kicked into high gear.  Ultimately, we exited palladium in September when commodity markets succumbed to panic selling. We had no choice at the time but to control risk in the trade.

Now it’s time to pick up where we left off…

Even with intense uncertainty in the marketplace over the past month, palladium is perking up nicely.  In fact, the illustrious metal is up 17% from its 52-week lows set in early October.

And there’s a good reason for the gains…

Metals analysts are now expecting a 2012 palladium supply shortfall.  It’s mostly because Russia, the number one global producer of palladium, is running low on inventory.

And that’s not a good sign… if you like low palladium prices.

You see, annual global palladium consumption has far exceeded global mining output for years.  But Russia’s always been able to fill the shortfall between mining output and end demand with massive stockpiles built in the 1970s and 80s.  It’s helped keep prices at reasonable levels.

But now it appears Russia’s ability to fill this palladium shortfall is coming to an end.

Here’s why…

Norilisk Nickel is the world’s largest palladium producer.  Their inventory has supplied nearly 15% of the global palladium market for years.

But recently, the Russian mining giant revealed they’re sharply cutting sales from their palladium stockpile in 2012- 2013.  And in 2014, they’re ending sales from their stockpile altogether.  According to one executive, the company’s once large stockpile is nearing the point of depletion.

And that’s not all…

There’s also speculation Russia’s once massive state owned palladium stockpile is nearly depleted as well.  A recently leaked Russian Ministry of Finance report revealed Russia is exporting 150,000 ounces of palladium in 2012 and 2013.  That’s a relatively tiny amount compared to years past.

Of course, that news alone isn’t a sure sign Russia’s stockpiles are depleted.  But a sudden drop in Russian palladium exports is very suspicious.  And it’s leading metals analysts to believe the sun’s setting on Russia’s big palladium stockpiles.

Why is all this talk of dwindling Russian inventories a big deal?

Palladium is a rare metal used heavily in the global automotive industry.  Along with platinum, the metal is essential to reducing harmful gases spewed by internal combustion engines.

While demand for palladium is growing, it’s also becoming increasingly hard to mine on a global scale.  High mining input costs and insufficient mining capacity are strong headwinds for palladium producers to overcome.

The upshot…

When Russia stops supplying the difference between annual consumption and mining output, palladium prices are virtually guaranteed to move higher.

Here’s how we’ll take advantage of the situation…


We’re getting long palladium via the ETFS Physical Palladium Shares (PALL) ETF.  As you may know, this is the same ETF we’ve used in the past to get long palladium. PALL holds physical palladium, not futures contracts like some commodity ETFs.  The price and movement of PALL is based on spot price of palladium.


Take a look at the chart…

PALL is currently trading at $65.10.  That’s below our last entry point of $72.56 earlier this year.  With a palladium supply shortfall expected in 2012, prices are almost certain to skyrocket.  Now’s the perfect time to add this metal back into our commodity ETF portfolio.


ETFS Physical Palladium Shares (PALL) is trading at $65.10.
Buy PALL up to $67.00 per share.
Our profit target is $85.00 or more.
Don’t forget your position sizing.

Commodity Review

Energy JJE $19.77 $20.66    -4.3%
Grains JJG $41.23 $45.82   -10.0%
Industrial Metals JJM $34.90 $36.65   -4.8%
Precious Metals JJP $91.23 $99.39   -8.2%
Softs JJS $68.49 $73.77   -7.2%
Livestock COW $29.57 $30.92   -4.4%
All Commodities DJP $42.06 $45.12   -6.8%


As 2011 comes to a close, oil remains surprisingly resilient to downward pressure. That’s amazing considering what other commodities have been through recently.  But there’s a reason for this strong performance.

There are simply too many bullish catalysts in the marketplace for oil…

Not only is the global supply/demand balance extremely tight, recent developments in Iran are looking downright scary.  The international community is close to placing strong economic sanctions on the rogue country due to its pursuit of nuclear weapons.  Unfortunately, the situation seems to be growing more unstable by the week.

For that reason alone, we have to stay long oil.  If the worst-case scenario actually comes to fruition- war with Iran- oil will shoot dramatically higher.

We’re currently sitting on gains of 16% in USL with plenty of profit potential remaining.  And short of a European debt disaster, there’s only one place for oil prices to go… UP.  Keep holding USL for more upside.

On the other hand, natural gas continues to underperform pretty much every other commodity on the planet.  Ample supplies are keeping prices firmly under wraps.  We’re keeping our position in UNL at a hold until the situation changes.


Grains sold off late last week as the USDA reported US grain supplies are more abundant than previously thought.  As you know, bigger than expected supplies are bearish for the price of any commodity.

As spring approaches, we’ll take another look at corn, wheat, and soybeans.  Until then, steer clear of these markets.  There are no catalysts to move grain prices meaningfully higher over the next two months.


With the exception of palladium, industrial metals are best left out of our portfolio for now.  Copper looks tempting at these levels, but palladium offers more long-term upside potential for our portfolio.


Gold and silver remained stuck in trading ranges in November…

The yellow metal traded from a low of $1,675 up to a high of $1,800 an ounce.  And silver fluctuated between $31 and $35 an ounce.  Obviously, that’s not much to get excited about.

But don’t let the slow market over the past few months fool you…

I’m expecting both of these metals to tally solid gains in 2012.  What’s more, over the past few days, I’ve been hearing market rumors of the Fed doing another round of quantitative easing (QE).

If that comes to pass… watch out.

Since QE is a highly inflationary move, both gold and silver would likely explode to the upside without warning.  But remember, at this point, all the QE talk is still just speculation.

However, no matter what the Fed does in coming weeks, fundamentals are still in place for higher gold and silver prices in 2012.

As far as our precious metals positions go, we’re keeping IAU at a hold.  However, our most recent gold trade, PHYS, is a buy up to $16.10.  And if you haven’t already, make sure you add silver (SLV) to your portfolio up to $33.00.


Soft commodities as a whole aren’t looking so hot right now.  In fact, every soft commodity across the board sold off over the past few days… including coffee.

As you know, we’re currently long coffee via the iPath Dow Jones-UBS Coffee ETF(JO).

So far, the seasonal trend of rising year-end coffee prices has yet to play out.  The general uncertainty over the European debt situation is likely keeping speculative coffee investors at bay this year.

Don’t give up on this trade just yet.  But remember, if JO trades below $54.00 in coming weeks, we’ll need to close this trade.  We don’t want to ride JO down if bears decide to take the coffee market dramatically lower.


Cattle prices lost ground over the past week.  However, unlike coffee, you should use the weakness in cattle prices as a buying opportunity.  Long-term cattle market fundamentals are simply too strong to ignore.

If you don’t yet own it in your portfolio, buy the iPath Dow Jones–UBS Livestock Subindex (COW) up to $30.50.

Portfolio Changes

  • This month we’re adding palladium (PALL) 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.