Commodity ETF Alert January 2013 Portfolio Update

| January 22, 2013


Precious Metals Markets Are On The Mend…

No doubt about it, it’s been a wild and unpredictable ride for precious metals over the past few months.

As a matter of fact, in what’s usually a seasonably strong period for gold, the yellow metal’s December 2012 price performance was undeniably weak.  Gold fell from $1,710 an ounce all the way down to $1,640 in mid-December.

What happened?

Quite simply, an unexpected rise in the US Dollar created a strong headwind for gold bulls in early January.  We can thank the unexpectedly hawkish tone of last month’s Federal Reserve meeting notes for the dollar’s rise earlier this month.

But now things are starting to settle down a bit…

Gold’s gained ground over the past two weeks and is within a whisker of breaking above $1,700 an ounce.

Take a look…

Gold Chart

As you can see, gold hit the $1,650 price point twice within the past month (green line). But what’s important to note is that both times buyers heavily supported the metal at that level.  As a result, we have strong technical support at the $1,650 area.  And barring an unforeseen disaster, it’s unlikely gold will break below that level anytime soon.

As you can also see, the 200-day moving average is currently at $1,663, which will also support the price of gold in coming weeks.

The only thing holding the yellow metal back at this point is the strong technical resistance at $1,700 (red line).  If buyers can push gold above this level, we should see gold retake the $1,750 to $1,775 area with relative ease.

Here’s the bottom line…

Gold’s performance has been less than desirable for us in recent months.  But now that the Fiscal Cliff mess is out of the way and the US Dollar appears ready to fall, gold bulls may finally get what they’re looking for.

Now, let’s take a look at silver along with our other open commodity ETF positions…

Position Updates

. . . . iShares Silver Trust (SLV) – HOLD

Silver’s finally back on stable ground…

As you know, it wasn’t long ago that bears were having their way with the silver market. But thanks to a recent drop in the US Dollar, the lustrous metal is now bouncing higher.  In fact, silver’s jumping back over $32.00 an ounce this morning.

But a falling dollar isn’t the only thing sending silver upwards…

Demand for physical silver is suddenly skyrocketing.  As a matter of fact, the US Mint is sold out of 2013 Silver Eagle coins due to unprecedented demand.  According to the US mint website, they won’t continue Silver Eagles sales until January 28th when new supplies become available.

As you may know, the American Silver Eagle coin is one of the most popular ways for investors to buy physical silver.

What does this sudden increase in coin demand mean?

Investors are clearly concerned about the loose monetary policy set forth by Ben Bernanke and the Federal Reserve.  Buying physical silver allows them protection from the ravages of a falling dollar and resulting inflation.

As you know, I moved our SLV position back to a buy in the last update.  Since then, SLV has surpassed our maximum buy up to price of $30.00 and is poised to gain even more ground.

This position will likely require patience, but the upside potential in silver still far outweighs the downside risk.

Keep holding SLV until further notice…

. . . . PowerShares DB Multi-Sector Metals Fund (DBB) – Buy up to $19.48

No doubt about it, recent Chinese economic data is supportive of higher base metal prices as the country’s fourth quarter GDP came in at 7.9%.  That’s a considerable rebound over the previous quarter’s growth reading of 7.4%.

What’s it mean?

The Chinese economy is regaining footing after a relatively poor performance last year. Most economists now see China’s economic growth stabilizing in the 8% area in 2013.

That’s great news for base metal investors.  As you many know, China accounts for 40% of global refined copper demand.  So if their economy is gaining steam, it’s highly likely they’ll raise copper imports going forward.

As of today, our DBB position is trading at $18.92… just under our original entry point of $19.48.  Due to the recent spate of strong Chinese economic data, along with the ongoing rebound in the US housing market, we’ll likely see base metal prices (especially copper) rise in coming months.

As a result, I’m moving DBB back to buy.  If you haven’t already, go ahead and buy DBB up to $19.48.

. . . . Powershares DB Gold Short (DGZ) – HOLD

Due to gold’s recent rally, our DGZ position has slowly dwindled.  As of this morning, we’re sitting on a 1.8% gain.

What should we do now that gold appears to be stabilized?

As you know, our original entry point in DGZ was $11.44.  Let’s put a stop loss on DGZ at that price.

In other words, if DGZ trades at $11.44 at any time in the next two weeks, go ahead and close this trade.  Doing so will get us out of the trade at breakeven if gold continues rising.

. . . . iPath DJ Cotton (BAL) – HOLD

Cotton is making a nice move higher in recent trading.  As a matter of fact, the fluffy commodity is testing the important $0.80 a pound mark this morning.

What’s causing the recent uptick in prices?

Quite simply, Chinese cotton demand is growing.  In order to satisfy their country’s domestic textile mill demand, the Chinese government began selling from state stockpiles in recent weeks.

As a result, US cotton exports should remain robust in the near future as the Chinese government replenishes their inventories.

Thanks to rising cotton prices, the iPath DJ Cotton (BAL) broke through the $50 resistance level I spoke of in the last update.  As of this morning, we’re sitting on a gain of 6.8% gain in BAL.

Now remember, the $0.80 a pound is an important level for cotton.  If cotton can trade above that level for a few days without a surge in selling activity, it’s highly likely we’ll see $0.85 cotton in coming months.

Keep holding BAL for our price target of $55.00…

. . . . iPath Pure Beta Cocoa (CHOC) – HOLD

The cocoa market is making some unusual moves in recent trading.  As you’re likely aware, we saw an uptick in prices last week as cocoa rose to $2,300 a ton.

But the gains didn’t last long…

As of this morning, cocoa is trading at $2,213, which is just a whisker away from breaking the early January lows of $2,200.  The fact that cocoa made a failed attempt at higher prices is not what we want to see.

What’s the failed attempt mean?

Even though underlying cocoa fundamentals are bullish, we could see lower prices in coming weeks.  Of course, our main concern is how low can cocoa prices go before we see a bottom.

Worst-case scenario, cocoa may drop to the $2,100 area in coming weeks.  If that were to happen, it would likely push our CHOC position down to the $32.00 area.  As you know, our original entry point is $33.60, so such a drop would have us sitting 4.7% loss.

What should we do?

Let’s push CHOC to a hold for now.  I don’t see a sudden change in cocoa fundamentals and the recent spate of selling should alleviate soon.  However, the inability for the market to find strength at this level concerns me.

If my view on cocoa changes in coming weeks, you’ll be the first to know.

For now, be patient and continue holding CHOC for a rebound…


Category: Commodity Trading