Commodity ETF Alert January 2011 Issue

| January 10, 2011 | 0 Comments



As readers of the Commodity ETF Alert, you’re all aware of the great year commodities had in 2010.  We saw multiple record moves and historic highs.

But one commodity class didn’t see the gains enjoyed by the others.

I’m talking about energy of course.

While oil and natural gas had a decent rally at the end of 2010, the energy sector still lagged behind the other sectors.

In fact, over the last 52 weeks, the energy commodity class has decreased 17%.  All of the other commodity classes are positive – some by large margins.

But now it’s 2011… and it’s time for the energy sector to shine.

What makes energy a good bet in 2011?

I’ll get back to that in a minute.  First, let’s take a look at what commodities make up the energy sector… and what impacts their prices.

The energy sector is driven primarily by four commodities: crude oil, natural gas, heating oil, and unleaded gas.

The biggest contributors to the group are crude oil and natural gas.  To some extent, heating oil and unleaded gasoline are tied to crude oil.

Of course, we all know what crude oil is.  Its price is the subject of national news… and it’s become a key economic indicator.  In fact, crude oil price tends to be a decent leading indicator of economic activity.

Many important business activities require crude oil in one form or another.  So when the economy starts to heat up, you’ll generally see oil prices ticking higher as well.

Natural gas is also a very important fuel.  It’s a cheaper alternative to crude oil and it’s the main fuel used for heating homes and buildings.  What’s more, huge reserves of natural gas have recently been unearthed.

Something to consider… if natural gas ever becomes a viable fuel for automobiles, it’s going to take on a whole new level of importance.

Another frequently watched energy commodity is heating oil.  This byproduct of crude oil has specific uses.  Like natural gas, heating oil is used as a heating fuel.  But what really makes heating oil distinctive is its use as an investment proxy for diesel fuel.

And that brings us to unleaded gasoline.  This commodity is the most accurate way to track gasoline prices.  If you own a vehicle, you know how important these prices are.

Here’s the thing…

All of these commodities tend to increase in price during periods of high economic growth.  However, there are a few other important factors to consider which can significantly impact prices.

First off, there’s the weather.

In cold weather, demand increases for natural gas and heating oil… particularly if it’s a really harsh winter.  On the other hand, unleaded gasoline usually increases in warmer weather as more drivers take to the streets.  And the summer’s always a popular time for road trips.

More importantly, there’s the supply side of the equation.

Inventory is a key component of price.  We saw that last year with natural gas.  New drilling technologies produced massive supplies of natural gas in the US.  As a result, prices plummeted.

Of course with crude oil, many believe we’ve hit peak oil.  In other words, the world’s oil supply is now a finite amount.  If so, this means every barrel of oil produced reduces the world’s oil supply accordingly.  Peak oil is a common theory for why oil prices are going astronomically higher in the years ahead.

Regardless of what you believe, we do know oil is getting harder and harder to extract.  And supply is definitely going to be an issue from here on out.

Here’s what’s really interesting…

The fundamentals are pointing to strong demand for energy commodities in 2011.

We know the emerging markets are growing like crazy.  China and India are two powerhouse economies needing fuel to continue driving their growth.  And I mean ‘fuel’ literally.  They’ll need oil and gas by the boatload for years to come.

And that’s not all…

Growth in the developed countries is gaining steam, particularly in the US.  2011 is going to be a key year in the economic turnaround.

What’s more, it’s been a tough winter… and we’re just getting started.  Cold weather and nasty storms are pounding the US.  This is causing the price of heating oil and natural gas to rise.  And it looks like it’s going to be a long winter…

Don’t forget about politics either.  We should see Congress pass the Nat Gas Act in 2011.  This legislation would call for the use of natural gas as transportation fuel.  And that means natural gas will take on a whole new level of importance… and demand.

Here’s the bottom line…

After a mediocre 2010, energy commodities are set to soar in 2011. 

Now’s a great time to add energy commodities to your portfolio.

The global economy is on the rebound.  China and India are sucking down fuel like there’s no tomorrow.  A cold winter is upon us… and just getting started.  Crude oil supplies are starting to tighten.  And, political action could make natural gas a big player in transportation fuels.

No matter how you look at it, energy is primed for a big run.

It’s time to take advantage of the surging demand for energy commodities.  Grab your shares of iPath Dow Jones-UBS Energy Index ETN (JJE) to profit from higher energy prices.

One more thing… We’re holding both crude oil and heating oil in our portfolio.  So, we’ll be doubling down on those two commodities.  That’s fine.  I’m very bullish on both of those commodities for the reasons mentioned above.  Plus, we’ll be gaining exposure to natural gas and unleaded gas as well.


We’re in a great position to profit from rising prices in the iPath Dow Jones-UBS Energy Index ETN (JJE).  JJE is an exchange traded note (ETN).  The goal of this ETN is to track the performance of energy commodities using futures.  Specifically, JJE tracks crude oil, heating oil, natural gas, and unleaded gasoline prices.  The ETN is heavily weighted towards crude oil and natural gas performance.


Take a look at the chart…


JJE is currently trading just under $23.  Look what happened the last time energy made a run in 2008… highs of over $80!  With the global economy heating up, don’t be surprised if energy prices shoot higher.  If history is any guide, JJE can really soar.


The iPath Dow Jones-UBS Energy Index ETN (JJE) is trading at $22.92.
Buy JJE up to $24.00 per share.
Our profit target is $36.00 or more.
Don’t forget your position sizing.

Commodity Review

Energy JJE $22.92 $22.69   1.0%
Grains JJG $51.80 $50.27    3.0%
Industrial Metals JJM $45.61 $44.66   2.1%
Precious Metals JJP $78.14 $79.35   -1.5%
Softs JJS $79.97 $76.98    3.9%
Livestock COW $30.45 $29.59   2.9%
All Commodities DJP $48.05 $47.11    2.0%


Energy is primed for a big climb in 2011!

As I explained earlier, now’s a great time to buy JJE and gain exposure to rising energy prices.  See above for all the trade details.


For the most part, grains are holding steady.  The markets appear to be waiting on this week’s USDA report.

Corn and wheat are off their highs as expected.  Both were overbought heading into late December/early January.

Another buying opportunity may open up in grains in the next few weeks or months… particularly if wheat and corn continue to sell off.  The upcoming USDA report could be a big deal and I’ll definitely be keeping an eye on it.


The strengthening economy continues to push industrial metals higher.  Copper and aluminum are both seeing strong demand heading into the new year.

And as long as the global economy keeps growing, I don’t see prices reversing anytime soon.

Our position in copper saw a quick 6% jump before settling in above our entry price.  I expect the price to continue trending higher.  What’s more, there’s very little downside with China’s seemingly insatiable demand for the metal.

Keep holding your shares in JJC for bigger gains.


Gold and silver have taken a hit recently.  Strength in the dollar and an improving economy are slowing the safe haven trade of 2010.  With the fear level decreasing, money isn’t pouring into precious metals like it had been.

I think this is temporary.  Fear of a double dip recession or currency collapse may be subsiding… but fear of inflation will soon takes its place.

I think gold and silver are in good shape in 2011 and I’ll be watching them closely.

In the meantime, our platinum position continues to hold its own.  PGM didn’t take the hit gold did… and it has already gained quite a bit back.  With an improving economy and worries of inflation on the horizon, platinum is in great shape.

Let’s continue holding our shares in PGM.


Cocoa has been volatile lately… no surprise given the state of political affairs in the Ivory Coast.

We’ve seen NIB spike and sell off… and now slowly climb higher.  Cocoa definitely reached an oversold situation but is now reversing the trend.

The situation in the Ivory Coast is calming somewhat but still isn’t near resolution.  I think NIB is going to continue its climb for the time being.

There’s still an opportunity to buy your shares in NIB below $45.50 if you haven’t yet done so.


Our position in livestock is holding its own.  COW continues to be a steady winner for us.  And I don’t see that changing anytime soon.

Live cattle prices continue to have a long-term upward trend.  And after spiking higher, lean hogs are grinding their way up.  More importantly, the fundamentals continue to show strength in the livestock market.

COW is a good, safe investment.  Let’s hang on to our shares.

Portfolio Changes

  • This month we’re adding Energy (JJE) to the portfolio.  See above for all the details.
  • We recently sold our position in Grains (JGG) for over a 20% profit.
  • We recently moved our position in Livestock (COW) to a hold.

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.