Commodity ETF Alert July 2009 Issue

| July 10, 2009 | 0 Comments

AN INVESTMENT SECRET FROM
THE FORBIDDEN CITY
It all started in the early 1400s.

The Ming Dynasty had just been established.  A new palace was needed for the Emperor.

Workers immediately began laboring on the new palace.  Master craftsmen from all over China began a long and strenuous odyssey.  They worked for more than 15 years constructing immaculate buildings and grounds.

By the time it was complete, the entire palace complex covered more than seven million square feet.

The palace was named “The Forbidden City”.

It served as the imperial palace and the heart of Chinese politics for almost five centuries.

The Forbidden City has always held the secrets of the Chinese elite.  Now, there’s a secret the Chinese are trying to keep from the rest of the world.

It’s a secret that not even the Forbidden City can hold.

What am I talking about?

I’m of course talking about China’s incredible growth and their insatiable demand for commodities.  Now, that’s not much of a secret.

The real secret is how the Chinese elite are going about acquiring needed commodities.

Everyone knows a successful and vibrant economy requires huge uninterrupted supplies of commodities.  To secure this supply, the Chinese have embarked on a major buying spree.

It’s something they’re trying to hide from the rest of the world.  But it’s undeniable.

They’re aggressively buying commodity producing companies around the world.  One big area of focus is the mineral rich “land down under”.  That’s right.  China’s swooping in and buying up every property on the market in Australia.

The numbers don’t lie.

Just six years ago, you could barely find China on the merger and acquisition map.  In 2003, China spent a mere $36 million dollars buying companies in Australia.  Today they’re the 800 pound gorilla.  They’ve already spent more than $6 billion this year! That’s a huge growth rate!

Why the intense focus on Australia?

Remember, Australia is a world leader in the production of commodities.  They’re a top producer of copper, lead, zinc, nickel, aluminum, and of course, precious metals.

It’s impossible to know exactly what commodities the Chinese are targeting, but a little research can give us a good idea.  For example, many of the acquisitions made by the Chinese are found in the mining industry.

Australia’s one of the largest producers of nickel in the world.  According to recent statistics, they’re a top 3 producer, mining more than 185,000 tons a year.

What’s so special about nickel?

Nickel’s a silvery metal that’s easily polished.  It’s often mixed as an alloy with other metals.  While nickel by itself isn’t very exciting, it’s a key component of many industrial and commercial products.  Clearly, nickel is an important piece of the Chinese economic expansion puzzle.

Now, nickel has thousands of uses (including the change jingling around in your pocket).  But today I’m going to focus on just two major applications.

One big use for nickel is as a component in stainless steel.  Stainless steel doesn’t rust and it’s very resistant to corrosion.  That makes it an ideal raw material for use in food service, aerospace, cutlery, and major appliances.  I’m sure you have some stainless steel products in your own kitchen.

Another growing use for nickel is in advanced batteries.

Right now this isn’t a major demand driver.  However, as battery technology advances, and as electric cars become more prevalent, demand is likely to skyrocket.

Just imagine millions of cars on the road… each with huge batteries filled with nickel. The demand is clearly a few years out, but it could be huge!

I see big demand building for nickel.

China’s aggressively acquiring commodity producers and major nickel producers are sure to be a target.  Add to China’s growing demand, the use of nickel in stainless steel and advanced battery technology, and prices have only one way to go… UP!

Now’s the time to buy nickel and profit from the coming jump in prices.

ABOUT NICKEL

The best way to invest in nickel is through ETNs.  The ETN I like the best is iPath Dow Jones AIG Nickel ETN (JJN).

For a quick refresher on ETFs and ETNs, take a look at our free ETF 101 guide.

Remember, because this security is an ETN, it’s actually a debt instrument issued by Barclays Bank.  It’s designed to provide exposure to the movement of nickel prices. Take a look at the prospectus for more details.

TECHNICALLY SPEAKING

Nickel has rallied off the lows from March and April.  After a quick run-up to the $25 level, we’ve retraced a bit.  Nickel prices are now reaching the 50-day moving average.  This level should act as support for the commodity in the next few weeks.

jjn071009

I think we could see nickel prices jump significantly in the next few months on increasing demand.  Watch for this commodity to reach the mid $30s in the next few months.

 WHAT TO DO NOW:

The iPath Dow Jones AIG Nickel ETN (JJN) is trading at $21.73.
Buy JJN up to $24.30 per share.
Our Profit Target is $32.00.
Don’t forget your position sizing.

Commodity Review
 

COMMODITY TICKER CURRENT VALUE LAST MONTH CHANGE
Energy JJE $22.87 $26.96 (15%)
Grains JJG $36.95 $46.20 (20%)
Industrial Metals JJM $27.47 $28.35 (3%)
Precious Metals JJP $46.55 $51.42 (9%)
Softs JJS $41.11 $41.61 (1%)
Livestock COW $29.08 $28.21 +3%
All Commodities DJP $34.39 $38.48 (11%)

ENERGY COMMODITIES

After a great run the last few months, energy prices are starting to pull back. Concerns over the economic recovery seem to have stopped the rally in its tracks.  Oil wasn’t much of a help, falling from just over $72 down to the $60 level.

The continued scrutiny of commodity prices by Congress isn’t helping the market either.  The CFTC’s proposed trading limits on energy commodities are making many traders nervous.

We’re still showing nice gains on the oil trade, but we shed some paper profits.  I’m still looking for a second half recovery… and with OPEC keeping the spigot closed, prices are sure to hit $80 in the next few months.

Natural gas is continuing to head lower this month setting a new low.  News of high inventories and weakening demand are pushing prices lower.  Storage levels are rising as production continues to increase.

We’ve seen energy stockpiles increase across the board over the last month or so… a sign consumption is down and supply is stable.

GRAIN COMMODITIES

Wow, could our timing have been more perfect?  Last month we exited our grain trade locking in solid gains.  This month, grain prices fell by 20%!  A slowing economic recovery is expected to limit grain consumption.  And, expectations of larger than expected harvests in the US will keep a lid on prices.

Apparently the wet weather at the beginning of the planting season didn’t do as much damage as expected.  If temperatures prove mild, look for a bumper crop this year.

New estimates from the Department of Agricultural show near record corn planting.  A big harvest will certainly depress corn prices.

INDUSTRIAL METALS

Industrial Metals is our trade for the month.  I see insatiable demand from China driving nickel prices higher.  Overall, the Industrial Metals group fell a slight 3% last month.

Our copper trade continues to hang in there.  Despite the turbulent month, we’re still above our entry point.  I’m adjusting the buy-up to price in light of the recent price action.  If you don’t already have it in your portfolio, buy it up to $32.  The run in copper is far from over.

Recent strength in the US Dollar has kept a downward pressure on prices.  If the US Dollar breaks lower, watch for commodity prices to pop.

PRECIOUS METALS

Last month we entered the gold trade.  It’s been painful to watch the recent price action.  After trading up over $970, gold’s retreated down to the $900 level.  Not the move we expected.

Our idea is still fundamentally sound.  Inflation should start rearing its ugly head soon… and that will help drive prices higher.  Remember, gold’s inflation adjusted high price reached back in 1980 is over $2,200 an oz.  Hold tight for now.

SOFTS

Little activity in the Softs market this month.  We had a small decline of 1%.  Sugar prices were noticeably higher on wet weather in India.  Monsoons could interrupt sugar production in the country.

The big news in cocoa… a 6% jump in prices occurred on one trade.  Everyone was trying to figure out what happened… then the exchange canceled the trade as an error.  (Easy come… easy go!)

LIVESTOCK

The one commodity complex up this month was Livestock.  We had a nice 3% gain. We’re finally seeing some upward momentum off the Lean Hogs trade we recommended a few months back.

News of the swine flu is hanging around, but not the lead story anymore.  Give it more time… we should see this move higher.

Portfolio Changes

  • This month we’re adding Nickel (JJN) to the portfolio.
  • We’re modifying the buy-up-to price for copper.  If you don’t have a position, try to buy it for under $32.

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.