Commodity ETF Alert December 2012 Portfolio Update
December 26, 2012
A Lot Is Riding On The Next Few Days…
Not surprisingly, Washington’s debate over the Fiscal Cliff is coming to a dramatic year-end conclusion. Weeks of partisanship bickering have left markets, both stocks and commodities, in a precarious position going into 2013.
Let me explain…
If a deal isn’t reached in the next few days, around $530 billion in tax increases will hit US taxpayers next year. What’s more, about $110 billion in federal spending cuts will affect the military and other governmental departments.
Economists unanimously agree such a scenario would cause a recession early in 2013- something completely unacceptable given the economy’s already fragile state.
I know I may sound like a broken record on this issue, but the importance of having a Fiscal Cliff deal passed by year-end can’t be overstated. Hopefully politicians will put the health of the US economy above their partisan goals.
Of course, our main interest lies in how commodities will be affected should the economy actually go over the cliff. A recession means economic growth will deteriorate, something that would undoubtedly hurt commodity markets.
For more on how the Fiscal Cliff will affect our open positions, let’s jump into this month’s update…
Position Updates
. . . . PowerShares DB Multi-Sector Metals Fund (DBB) – HOLD
Industrial metals pulled back a bit in recent trading. Copper fell from $3.70 a pound on December 12th, down to $3.54 late last week. The same goes for aluminum as it fell from $0.98 a pound a couple weeks ago to $0.92 as of Friday.
Zinc is the only component of DBB that’s held its ground in recent trading. The industrial metal is still trading at multi-month highs near the $0.93 a pound level.
DBB is trading at $19.22 as I write, which equates to unrealized 1.3% loss from our entry point of $19.48. Of course, that’s an extremely small drawdown and nothing to worry about at this point.
However, should politicians fail to reach an agreement by the end of the week, we may see industrial metals fall further. Due to this possibility, let’s keep DBB at a hold until further notice.
. . . . US 12-Month Natural Gas (UNL) – HOLD
Another warm start to December 2012 sent natural gas prices down to $3.30 mmBtu in recent trading.
In order for natural gas to recover recent losses, we need to see sustained cold temperatures in the eastern half of the US. Below average temperatures for the next couple of months should be enough to put a big dent in EIA inventory numbers.
If temperatures don’t cooperate, it’s not out of the realm of possibility to see natural gas fall back to the $3.00 area.
But don’t let that possibility worry you…
We’re currently sitting on a 5% gain in UNL, so we have some room to let this trade go a bit longer. Should temperatures drop (along with natural gas inventory levels), we’ll keep this trade open and reap the rewards of higher natural gas prices.
However, if Mother Nature doesn’t cooperate and temperatures remain warmer than usual, we’ll likely have to close this trade at breakeven. As you know, our entry price for UNL in $16.66.
Once again, IF UNL falls to $16.66 in coming weeks, go ahead and close this trade. While I’m still wildly bullish on natural gas in the long-term, we may be able to pick the commodity up at an even cheaper price in the spring of 2013.
. . . . iShares COMEX Gold Trust (IAU) – HOLD
Gold experienced a wild sell off last week. In fact, the yellow metal went from $1,700 an ounce on December 18th, to $1,659 as of Monday’s holiday-shortened trading session.
Why is gold plunging in what should be one of its strongest times of the year?
With all the fear and uncertainty surrounding the Fiscal Cliff issue, investors simply aren’t willing to take much risk in precious metals right now. Not only are investors unwilling to establish new positions, they’re also closing profitable positions.
And since gold is up around $100 an ounce since the start of the year, or about 6%, the yellow metal is in sellers’ crosshairs.
When will the selling subside?
To answer that question, let’s look at a chart…
As you can see, gold is currently trading at the 200-day moving average (dma)- an important technical support zone. The yellow metal should be able to hold this level in the final few days of 2012. What’s more, the 200 dma should bring technical buyers back into the market.
However, if the worst comes to pass and no deal is reached on the Fiscal Cliff, $1,600 may be in the cards for gold.
As of today, we’re sitting on a 4.3% gain in IAU. Let’s keep this trade at a hold for the time being.
But if gold plummets further due to Fiscal Cliff antics, and IAU hits $15.47, let’s close the position. As you know $15.47 is our original entry point for IAU. Selling at that price will get us out of the trade at breakeven.
Be patient for now, but don’t let IAU turn into a losing trade.
. . . . iShares Silver Trust (SLV) – HOLD
Like its big brother gold, silver endured its own hefty selloff last week. In fact, the lustrous metal dropped from $32.30 an ounce on December 18th to just below $30.00 an ounce on Monday.
Obviously, this isn’t what we’re looking for out of silver. As of today, we’re sitting on a 10% unrealized loss is SLV.
However, let’s not jump the gun and close this trade just yet. While the ETF is pushing our limits as far as allowable losses are concerned, I suspect the metal’s downdraft is near an end.
In fact, silver should pop firmly above $30 in coming weeks as long as Washington politicians don’t do the unthinkable- let the US economy go off the Fiscal Cliff. But just in case they do, let’s put a stop loss on this trade.
If SLV falls below $28.50 in coming days, close the position.
It’s unfortunate that politicians have put markets in such a precarious position. But what happens in Washington is obviously out of our control.
The long-term fundamentals remain bullish for silver, but we can’t ignore what’s going on in the marketplace right now.
. . . . PowerShares DB Gold Short (DGZ) – HOLD
Thankfully, our gold short position is giving us gains. In fact, DGZ is up 4% from our buy price of $11.44.
Should the US go over the cliff and gold prices fall further, DGZ should give us some solid profits in coming weeks.
Let’s keep holding DGZ just in case that happens…
. . . . iPath DJ Cotton (BAL) – HOLD
So far, cotton is moving firmly in our favor…
On December 11th, the USDA lowered their 2012-2013 ending stocks estimate from 5.8 to 5.4 million bales. While 5.4 million is still a lofty inventory level, it’s down a bit from last month.
What’s more, cotton planting expectations for 2013 are weakening due to the cotton-to-grain switching we talked about in this month’s trade alert.
Of course, the most important factor for us is that BAL is rising. In fact, the ETF has moved beyond our buy up to price of $49.00 in recent trading. As I write, we’re sitting on a 3% gain with BAL trading at $50.25.
Thanks to this recent rise, I’m moving BAL to a hold. Let’s keep riding BAL higher, as cotton prices should be able to surpass the $0.80 a pound level in coming months.
Category: Commodity Trading
