Commodity ETF Alert February 2013 Issue
PALLADIUM’S PERFECT STORM…
As long time readers know, I’m a staunch palladium bull.
The supply/demand fundamentals for the rare industrial metal are undeniably bullish, and have been for some time now.
But as you may also know, we were long palladium in the Commodity ETF Alert portfolio for most of 2012 and didn’t reap any rewards.
In fact, we had to close last year’s palladium trade for a loss.
What went wrong?
Before I explain what happened last year, and why a new trade in palladium is highly warranted, let’s do a quick recap of palladium and what it’s used for.
Let’s get to it…
As you may know, palladium is part of the platinum group metals (PGM), which also contains the elements ruthenium, rhodium, osmium, iridium, and platinum.
Palladium is a relatively rare metal considering that 80% of the known ore deposits are centered in one region… the Bushveld complex of South Africa.
The global automobile industry is the primary consumer of palladium since the metal’s unique composition makes it a perfect autocatalyst.
For those of you unfamiliar with the term, an autocatalyst is a metal capable of turning harmful gaseous internal combustion engine emissions into less harmful carbon dioxide, nitrogen, and water.
Approximately 85% of cars produced globally require catalytic converters in their exhaust system. That means palladium prices are highly susceptible to strength/weakness in the automobile sector.
Unfortunately, that fact is the main reason why our palladium trade failed last year.
Let me explain…
Even though supply/demand fundamentals for the white metal were solidly bullish last year, Europe’s debt crisis sent shockwaves through commodity markets… especially palladium.
You see, given Europe’s immense financial bind, investors realized economic growth on the continent was in trouble. As a result, many thought European auto sales were ready to fall off a cliff- a scenario that would greatly decrease palladium demand.
But as you know, the worst never happened in Europe. Yes, things are still a bit foggy, but the fact is Europe’s economic outlook has brightened considerably over the past six months.
And that’s just the start of it…
Another prevalent fear from last year is subsiding… China.
Palladium investors have been worried a hard landing for the Chinese economy would derail auto sales in that country as well. But take one look at recent data and you’ll find auto sales are actually surging in the Asian country. January 2013 auto sales rose to a new monthly record of just over 2 million vehicles.
Add in resilient strength from US auto sales, and investors are finally realizing palladium demand is on the upswing.
But growing global auto sales are only part of the bullish palladium picture…
The most prevalent factor in my positive view of this industrial metal is the growing concern over global supplies. As long-time readers know, Russia has long been a savior for the global supply of palladium with their massive stockpiles built in the 1970s.
But thanks to years of weak global mining output, Russia’s enormous palladium stockpiles have dwindled. Russian palladium exports have declined over the past five years and some analysts predict the country may not export palladium at all in 2013.
And if that weren’t enough…
South Africa’s mining industry is in a state of upheaval.
The world’s largest producer of PGMs, Anglo American Platinum (AGPYY), just announced they’re closing two South African mines due to poor economics. According to the company, PGM prices are too low compared to the expense of bringing the metals to earth’s surface.
Remember, 80% of mined palladium supplies come from the Bushveld Complex of South Africa. With miners slowing production in the region, it’s highly likely the global palladium market will tighten dramatically in 2013.
As a matter of fact, some analysts see palladium going into outright deficit this year. For example, Barclays Capital sees palladium demand outpacing supplies by just over 500,000 ounces. Deutsche Bank sees a deficit of 900,000 ounces!
Folks, palladium bulls are sharpening their horns. While there’s no doubt we’ll see volatility in palladium prices this year, the odds are strongly in our favor that prices will reach record highs of $850 an ounce by year-end!
ABOUT PALLADIUM
We’re getting long palladium via the ETFS Physical Palladium Shares (PALL) ETF. As you may know, we’ve used this ETF in the past to get long the palladium market. PALL holds physical palladium, not futures contracts like many commodity ETFs. The price of PALL varies based on fluctuations in the spot price of palladium.
TECHNICALLY SPEAKING
As you can see from the long-term weekly chart, PALL is establishing a new uptrend after being stuck in range bound trade for all of 2012. With the price breaking firmly above technical resistance at $70, it’s time to establish a long position in PALL.
Now, let me be clear about something…
Like I said a minute ago, we’ll likely see plenty of volatility in palladium prices this year. So don’t be surprised to see PALL revisit the $70 area in coming months. If it does, use the pullback as a buying opportunity!
WHAT TO DO NOW
ETFS Physical Palladium (PALL) is trading at $74.37.
Buy PALL up to $76.00 per share.
Our profit target is $86.00 or more.
COMMODITY REVIEW
| COMMODITY | TICKER | CURRENT VALUE | LAST MONTH | CHANGE |
| Energy | JJE | $17.77 | $17.11 | +3.9% |
| Grains | JJG | $52.42 | $51.83 | +1.1% |
| Industrial Metals | JJM | $35.65 | $34.81 | +2.4% |
| Precious Metals | JJP | $88.60 | $88.09 | +0.6% |
| Softs | JJS | $52.11 | $52.78 | -1.3% |
| Livestock | COW | $27.32 | $28.66 | -4.7% |
| All Commodities | DJP | $41.63 | $41.00 | +1.5% |
ENERGY COMMODITIES
One thing’s for sure…
It didn’t take long for West Texas Intermediate (WTI) crude to pop up to the $95-$100 a barrel range. Newfound optimism over the global economy, as well as growing Middle East tensions, has WTI trading at $97 a barrel.
Of course, we’ve seen this time and again. Oil prices rise early in the year on optimism, only to give back gains in Spring when some sort of economic headwind hits the headlines.
As you know, we’re not riding WTI higher this time around because of the uncertainty surrounding the Fiscal Cliff in late 2012. But just be patient. We’ll get our opportunity for crude market profits soon.
As far as natural gas goes…
Even though much of the US saw plenty of cold weather over the past few weeks, natural gas supplies are still abundant. In fact, inventory levels are still 12% above the five-year average for this time of year. That’s not what you want to hear if you’re bullish on natural gas.
As you know, we stopped out of our long natural gas trade a few weeks ago at breakeven. Early winter warmth set the heating season off on the wrong foot making EIA inventory withdrawals weaker than expected in mid-December 2012.
Let’s be patient and wait for natural gas to come back down to our buy level this Spring. Once it does, we’ll have another shot at big gains into late 2013!
GRAIN COMMODITIES
Corn and soybeans saw a bit of buying pressure in mid-January as worries popped over funky South American weather patterns. Dry weather in Argentina put a bid under corn, while excess Brazilian rain put a bid under soybeans.
However, once the USDA’s monthly WASDE report was released last Friday, bears took control once again. The USDA reaffirmed its outlook of a record amount of acreage going to corn and soybean crops in the US this planting season.
We’ll likely see range bound trade for grains for a while longer. Steer clear of these markets for the time being.
INDUSTRIAL METALS
Strong Chinese economic data has the price of copper pushing to multi-month highs around the $3.80 a pound level. China’s global trade totals were robust in January with exports up 25% and imports rising 28.8%. Strong import and export data clearly points to the Chinese economy gaining steam in early 2013.
As you’re likely aware, that’s good news for industrial metals like copper, aluminum, and zinc. Of course, those are the three commodities held in our Powershares DB Base Metals ETF (DBB).
As of today, we’re sitting on a slight gain in DBB. Let’s keep holding DBB as copper prices look poised to jump back above $4 a pound in coming months.
PRECIOUS METALS
Unfortunately, gold remains stuck in the same holding pattern around $1,650- $1,670 an ounce. Bulls just can’t seem to get the momentum they need to push the yellow metal back above $1,700.
Since we’re long gold via the iShares COMEX Gold Trust (IAU), the lack of bullishness leaves us in a precarious position. Should we take our small IAU gains now? Or should we remain long to see what happens?
With fundamental news not making much of a difference in week-to-week pricing, let’s take a look at a chart of the yellow metal for guidance…
As you can see, gold is still flirting with the 200-day moving average (dma). Professional investors use the 200-dma as a decision making point, which may lead to technical buying in the near future. As a result, let’s keep holding our long IAU trade for a potential bounce.
However, if the 200-dma is broken, gold may return to the 2012 lows of $1,550. To protect against such a situation, let’s place a stop in our IAU trade at $15.47… the breakeven price point for this trade.
Let me repeat, if IAU trades at $15.47 in the next two weeks, go ahead and close your long position.
The fundamentals for higher gold prices have been with us for months, but we’re just not seeing the buying interest needed to move prices upward. That in itself is a bearish sign.
As far as silver goes, the lustrous metal is still firmly above $30 an ounce…
However, trading has been akin to watching paint dry over the past few weeks. No matter what bullish fundamental news item pops up, silver can’t seem to find a sustained bid.
As you know, we’re currently sitting on a 7% loss in the iShares Silver Trust (SLV)… not at all what we’re looking for.
But let’s not get too antsy…
Given the bullish potential for this trade, we have to give SLV a bit more time and a bit more wiggle room. As long as SLV stays above $28.50, we’re keeping this trade in the portfolio.
Of course, the recent weakness in gold has our Powershares DB Gold Short ETN (DGZ) on the verge of breaking to new multi-month highs. As you may remember, we put on our trade in DGZ due the potential uncertainty surrounding the Fiscal Cliff a few months ago.
As of today, we’re sitting on a 4.6% gain in DGZ. Let’s keep holding this inverse gold play with a breakeven stop of $11.44. If gold breaks firmly below the 200-dma, we’ll have a nice winner on our hands in DGZ.
SOFTS
Other than cotton, soft commodities have disappointed bullish investors over the past few months. In fact, both coffee and sugar have traded at new 52-week lows in recent weeks.
But as you know, we established a long position in the iPath DJ Cotton (BAL) in December 2012. At the time, I laid out cotton’s bullish thesis and we established a long position at $48.67. As of today, we’re sitting on a 10% gain in BAL as it trades for $53.50.
But now the question is, do we continue holding BAL for our $55.00 price target?
Since we’re within a whisker of $55, let’s go ahead and close BAL for a tidy short-term profit. We could stick around a bit longer, but I don’t want to risk giving up the gains we’ve achieved in recent weeks.
Congratulations on a nice trade!
As far as cocoa goes, the recent downtrend is continuing after investors found the price couldn’t sustain the $2,300 a tonne level in mid-January. Our losses are still small in the iPath Pure Beta Cocoa (CHOC), so don’t get overly concerned just yet.
Cocoa is still expected to go into deficit in 2013. Let’s keep CHOC at a hold until further notice…
LIVESTOCK
Both live and feeder cattle prices endured hefty selling in recent weeks after a big bank came out slightly bearish on cattle prices. Morgan Stanley (MS) contends that even though US domestic beef inventories are at their lowest since 1952, the cattle industry is positioning itself for significant expansion going forward.
As a result, the bank sees cattle prices weakening in 2013. That’s a sharp contrast from various bullish cattle reports seen in recent months.
Portfolio Changes
- This month we’re adding palladium (PALL) to the portfolio.
Category: Commodity Trading
