Commodity ETF Alert February 2010 Portfolio Update
February 23, 2010
Good relationships sometimes get awkward…
Sometimes relationships get weird. Things can ride along just peachy for a long time. But then something comes along throwing a wrench in the works. A once happy relationship can be soured in no time.
What the heck am I talking about?
No, I’m not talking about a relationship amongst humans. I’m talking about the relationship between the U.S. Dollar and the commodities complex. You see, a rise in the dollar translates into cheaper commodity prices. This inverse relationship has held true for a long time.
But something very interesting happened last week…
The U.S. Dollar rose… but so did the price of gold, silver, and oil. It seems the inverse relationship took some time off last week. Is this a sign of things to come? Well it could be, it’s very tough to predict exactly how this will play out in the months and years to come.
But it does raise some interesting possibilities. When the dollar stays steady and even rallies a bit, commodities should stay steady or even weaken.
When this relationship loosens, the market is telling us something.
It may be pricing in future inflation. It could also be pricing in future lack of supply for the respective commodity.
We’ve been investing in commodities for a number of reasons. But one of the main reasons is that of inflation protection. Things are going to get interesting…
Now, let’s take a look at our open positions…
Position Updates
. . . . iPath S&P GSCI Crude Oil Total Return ETN (OIL) – Hold
Crude spiked from the low $70s back to near $80 in recent trading. Recent inventory reports showed an increase in inventories and weak demand, a bearish sign for oil. But something interesting happened… the price of crude didn’t fall. Even as the dollar rose last week, oil found a good bid. An interesting development we’re going to keep a close eye on.
Everybody has had the chance to get in on OIL below $25.50. Let’s move this one to a hold. We see higher oil prices in the long term, but short term movements depend on economic readings and the equities markets.
. . . . iPath Dow Jones-UBS Aluminum ETN (JJU) – SELL
Aluminum (JJU) bounced off the 200-day moving average which coincides with the $27 support zone. Since Aluminum is strictly an industrial metal, its price swings on measures of economic strength and weakness. Perceived weakness in world economies and the resulting weakness in global equity markets could bring JJU back down quickly. So let’s not run the risk of this one going against us. Let’s go ahead and take profits in JJU right here. This gives us a return of around 10%…
. . . . iShares Silver Trust (SLV) – Buy up to $17.00
Silver prices got a nice bounce over the last couple of weeks. Remember, the upside potential for silver is huge. The future industrial demand looks to increase dramatically. New technologies such as silver-zinc batteries for electronics and hybrid cars point to larger demand. Not only that, but the inflation protection of silver coins will help keep the price of silver buoyed. If you don’t have silver in your portfolio yet, consider adding some at these levels.
. . . . iShares COMEX Gold Trust (IAU) – HOLD
Gold rebounded off the $1,050 area in recent weeks. As we mentioned above, the inverse price relationship between gold and the U.S. Dollar loosened in recent days. I don’t know if this interesting scenario will continue, but it points to inflation creeping in. Keep holding IAU, at the worst we think gold could pull back to the $1,000 level. After that, the sky is the limit for gold… Keep holding IAU for bigger gains.
. . . . iPath DJ AIG Grains ETN (JJG)- Buy up to $37.00
JJG is holding the $35 support zone quite well. We also are seeing USDA wheat harvest estimates for 2010 coming in 14% lower than the 2009 harvest. It’s also the lowest since 1913. This should keep the price of wheat supported going into the spring. Any chance to buy below $37 should be taken!
Action To Take
- Sell Aluminum (JJU)
Category: Commodity Trading
