Commodity ETF Alert February 2012 Issue
As you know, we’ve kept close tabs on the US Dollar in recent portfolio updates.
Why such a watchful eye?
The greenback is the world’s reserve currency. And that means the dollar plays a leading role in the direction of commodity markets.
How does this association work?
The intricate workings of the dollar/commodity relationship are a bit complicated.
All you need to know is this…
There’s a strong inverse correlation between the dollar and commodities. In other words, when the dollar rallies, commodities tend to fall.
And that’s exactly what happened over the past few months…
Dollar strength played a major role in keeping commodities under wraps in Q4 2011.
But here’s the key…
In the heat of the recent dollar rally- when other investors were getting bullish, I knew the greenback’s upside was limited.
How?
Continued inflationary policies from Ben Bernanke and the Federal Reserve virtually guarantee all short-term dollar rallies are destined to fail.
And fail it did…
Since we last spoke, the US Dollar index slipped from 80 down to 78.5… a 2% drop. And keep in mind, this recent drop is on top of the 2% dollar slump I highlighted in the last portfolio update. That makes for a 4% tumble since early January.
It’s painfully obvious the dollar’s fallen out of favor in recent trade.
But more importantly, the sinking dollar’s bullish effect on commodities is plain as day. A number of hard assets rose dramatically last month. But without question, the metals complex turned in the best performance.
I’ll get to more of those juicy details in a few minutes.
But first, let’s get into this month’s trade…
As weak as the dollar’s been the past few weeks, there are still some commodities yet to turn to the upside. That means there’s profit potential waiting for us to latch onto.
There’s one commodity in particular that I have my eye on. It’s an asset we’ve traded in the CEA with great success in the past. In June 2010, we bagged a whopping 38% profit. And just last year we captured gains of 23% in this sweet commodity.
Which commodity am I talking about?
Sugar…
Now, I’ve mentioned in previous reports that most of the world’s sugar is refined from sugar cane. And without a doubt, the world’s largest sugar cane producer is Brazil. Year-in and year-out, the South American country fulfills most of the world’s sugar needs.
So it goes without saying, whenever there’s news regarding Brazil’s sugar industry- investors listen closely.
And that’s exactly what’s happening right now…
Recent reports suggest Brazil’s cane harvest season is getting off to a slow start. Heavy rains in Brazil’s Centre South region are putting farmers behind schedule. In fact, forecasters now estimate unusually wet weather will keep cane harvesters out of the fields until May.
Naturally, that has the sugar market on edge…
Why?
The Centre South is the largest cane-producing region in Brazil. If harvests from this important area encounter problems, investors react by bidding sugar prices higher.
But that’s not the only issue…
A delayed Centre South harvest also creates problems at Brazil’s shipping ports. When the weather finally clears and harvesting resumes, a rush to get sugar to market creates a bottleneck at Brazilian seaports.
Sugar trucks are backed up for miles and ships wait weeks for their turn at port. This same port backlog problem helped propel sugar skyward in 2010 and 2011. And by the looks of things, it may happen again this year.
But that’s not all…
There’s yet another chapter to Brazil’s bullish sugar story.
High global oil prices spurred Brazil’s ethanol industry over the past five years. As a result, Brazil’s transportation industry has grown increasingly reliant on the biofuel.
However, exceptionally high sugar prices over the past two years enticed cane refiners to produce more sugar and less ethanol. That production imbalance has left Brazil’s ethanol inventories at multi-year lows.
Due to the shortage, the country’s returned to expensive gasoline imports in order to meet fuel demand.
But that could be changing soon…
Recent reports suggest Brazilian refiners will produce more ethanol in 2012. In fact, they’re expected to increase ethanol output back to 2008 levels… the highest on record.
If that happens, investors should push sugar prices higher. After all, as ethanol production increases… sugar production decreases.
The combination of all these factors makes a very bullish case for sugar prices in 2012. So let’s take the bull by the horns and jump on the sugar trade once again!
ABOUT SUGAR
We’re getting long sugar via the iPath Dow Jones-UBS Sugar (SGG) ETN. Maybe you remember, this is the same ETN we’ve used in the past to get long sugar. SGG tracks the Dow Jones-UBS Sugar Total Return Sub-Index. The index reflects the returns potentially available through an unleveraged investment in the futures contracts on physical sugar.
TECHNICALLY SPEAKING
As you can see, sugar has yet to break out of the downtrend from late August 2011. But if Brazil’s harvest delays continue, prices are highly likely to escape the downtrend and shoot higher.
WHAT TO DO NOW:
iPath Dow Jones-UBS Sugar (SGG) is trading at $84.36.
Buy SGG up to $85.50 per share.
Our profit target is $100.00 or more.
Don’t forget your position sizing.
| COMMODITY | TICKER | CURRENT VALUE | LAST MONTH | CHANGE |
| Energy | JJE | $18.80 | $19.67 | -4.4% |
| Grains | JJG | $45.06 | $45.33 | -0.6% |
| Industrial Metals | JJM | $38.65 | $35.37 | +9.3% |
| Precious Metals | JJP | $95.19 | $86.97 | +9.5% |
| Softs | JJS | $68.42 | $69.40 | -1.4% |
| Livestock | COW | $30.21 | $29.45 | +2.6% |
| All Commodities | DJP | $43.36 | $42.87 | +1.1% |
ENERGY COMMODITIES
The Iranian situation remains highly uncertain…
One day the rogue nation looks like it may comply with international demands, and the next they’re threatening to shut down the Strait of Hormuz.
Obviously, no one except the highest ranking US defense officials really have a clue where the Iranian standoff is heading. For all we know, it could be resolved peacefully.
However, recent actions could also be the beginning of a major confrontation.
As commodity investors, we’re concerned with the Iran standoff because of its effect on oil prices. As you probably realize, if things get out of hand with Iran… the sky’s the limit for oil prices.
As I write, oil’s fluctuating around $101 a barrel. That’s up from a few days ago, but down from the $103 mark set on January 3rd.
Like I’ve said before, the downside risk for oil prices is far less than the upside profit potential. That’s why we’re sticking with our position in USL.
Keep holding USL for further gains.
Natural gas looks mighty interesting at current prices…
Producers are finding it increasingly difficult to profit from exceptionally low natural gas prices. As a result, a couple of companies are simply throwing in the towel. Both Chesapeake Energy (CHK) and Conoco Phillips (COP) are shutting in dry gas production in certain areas of the country.
Let me reiterate what I said two weeks ago…
Barring some unforeseen news, I don’t think natural gas prices will stage a dramatic rally any time soon. However, I do think gas prices are forming a major multi-year bottom at current prices. One day we’ll look back at current prices and be thankful we bought when we did.
Remember, I moved UNL back to a buy in our last portfolio update. If you haven’t done so already, buy UNL up to $20.
GRAIN COMMODITIES
Grain market fundamentals are mixed at the moment…
Last month’s potentially bullish weather worries have been replaced by reports of ample supplies. According to the USDA, global supplies of wheat and corn are abundant. What’s more, analysts project another bumper crop for 2012.
No trades in grains this month, but I’m keeping an eye on them for future issues.
INDUSTRIAL METALS
Industrial metal prices caught fire last month…
Copper, palladium, and platinum all recorded stellar gains. And as you know, we’re holding copper and palladium in our portfolio.
You should be sitting on solid profits in these metals… especially copper. In just one month’s time, copper shot from $3.40 a pound up to $3.98… a 17% jump.
That’s a sweet short-term rally no matter how you slice it!
But let’s not overstay our welcome…
As you know, our copper trade was based on a short-term technical pattern. Since that pattern has run its course, let’s go ahead and ring the cash register.
Sell JJC for a short-term gain of 13%. Congratulations on a profitable start to the New Year!
Palladium is making strong gains as well…
On January 9th, palladium could be had for $610 an ounce.
But not anymore! As the dollar crumbled in January, the industrial/precious metal jumped to nearly $720 an ounce.
As of today, we’re sitting on a 5% gain in our PALL trade. But unlike copper, we’re sticking with palladium. The long-term fundamentals are very bullish and I think this metal has plenty of upside remaining.
Keep holding PALL for bigger gains…
PRECIOUS METALS
Precious metals stacked on nice gains last month as well…
Gold surged to just over $1,750 an ounce in late January before pulling back slightly last week. That’s a $200 jump for the yellow metal in January alone.
As a result, both of our gold ETFs rose nicely last month. IAU is currently up 27%while PHYS is on the verge of leaving our $15.00 buy-up-to-price in the dust. Keep holding IAU for bigger gains and buy PHYS below $15 while you can. I don’t think gold will be trading below $1,750 for much longer.
Meanwhile, silver is up 25% from the late December lows…
As long-time readers know, I’ve talked until I’m blue in the face about bullish fundamentals in the silver market. If you haven’t got it in your portfolio yet, all I can say is get it while you can.
If things pan out like I think they will, silver may never see the $30 range again. So if you haven’t already, buy SLV before it breaks above our maximum buy-up-to-price of $33.
SOFTS
The past six months have been surprisingly uneventful for coffee, cotton, and cocoa. What’s more, all three of these commodities remain in long-term technical downtrends.
Barring a dramatic fundamental change, these commodities are unlikely to see prices break higher any time soon.
With the exception of sugar, it’s best to steer clear of softs right now…
LIVESTOCK
Fundamental signs are still pointing towards higher cattle prices in 2012. However, live cattle prices are having a hard time breaking above $1.26 per pound. That price area seems to be an area of strong technical resistance.
As a result, COW is still trading just above our entry price. Let’s give COW a little more time to get going. The long-term fundamentals are too strong to give up on this trade right now.
If you haven’t already, buy COW under $30.50…
- This month we’re adding sugar (SGG) to the portfolio. See above for all the details.
Category: Commodity Trading
