Commodity ETF Alert July 2012 Issue

| July 10, 2012 | 0 Comments


Like a car spinning its wheels in the mud, gold’s stuck in a major rut this year.

In fact, the yellow metal’s traded in a relatively tight range between $1,550 and $1,700 an ounce since March 2012.

That’s not so bad compared to other commodities.  But for precious metal bulls, this has been a surprisingly lackluster year thus far.

Why’s gold acting so poorly in a year filled with economic uncertainty?

After all, the yellow metal is known for its relative safety in tumultuous economic times.  When things get tough on the global economic scene, investors traditionally turn to gold as an insurance policy.

Last year was the perfect example…

When Europe’s debt drama took a turn for the worse in July 2011, the S&P 500 plummeted by 15% in less than a month’s time.  But the immense uncertainty of the situation sent gold skyrocketing from $1,500 to $1,900 an ounce… a 25% jump.

Clearly, investors ran into the assuring arms of gold in times of extreme uncertainty last year.

But this year, with Europe’s debt troubles just as (if not more) uncertain as last year, the yellow metal’s been met with nothing but selling.

The question is… why?

Why is gold encountering selling in recent months when global economic uncertainty is arguably reaching an all-time high?

As perplexing as the question may sound, the answer is actually quite simple.  Instead of buying gold to fight uncertainty this year, investors are using this store of wealth as a means to raise cash.

In other words, the gold market is being used as a piggy bank…

Investors that are underwater on other assets are using their long-term gold gains as a means to raise cash and meet margin calls.  After all, another way to counter uncertainty is get as ‘liquid’ as possible.  And raising cash has become the popular trade when it comes to fighting economic uncertainty in 2012.

But that may be about to change…

This cash-raising phenomenon won’t last forever.  Remember, US interest rates are at a historic low.  As a result, cash sitting in the bank is collecting virtually nothing in terms of interest.

And when taking inflation into account, investors are actually losing money by holding cash for an extended period of time… something known as a negative real interest rate.

Now, it’s hard to say exactly when investors will turn away from cash and get back into appreciable assets like gold.  But judging by a technical pattern that’s been developing in the gold market since early 2012, that time may be close at hand.

Take a look…


As you can see in this long-term weekly chart, gold had a phenomenal run from 2009 through the summer of 2011.  But as you can also see, the past year has been quite unimpressive for investors as the yellow metal struggled to hold onto 2011’s gains.

But here’s where it gets interesting…

Take a look at the blue lines in the chart above. Notice how the lines are coming together to meet at a common point.  In technical analysis, this is known as a consolidation pattern.

A consolidation pattern is when an asset goes through a period of contracting volatility and sideways price action.  While it may appear that the asset is underperforming in times of consolidation, it’s actually a sign of a healthy market.

But here’s the best part…

Consolidation patterns like you see above usually result in an explosive price move. And since gold is still in a long-term uptrend, it’s highly likely the next move is higher.

In fact, professional investors are already placing their bets on rising gold prices. According to Commodity Futures Trading Commission (CFTC) data, the speculative net long position in gold rose nearly 19% in the week ending last Tuesday.

In case you’re unaware, CFTC data is essential in understanding how professional investors position their accounts from week to week.  The increase in gold net longs is a great sign that gold market bearishness is beginning to wane.

So let’s not waste another minute.  Now’s the perfect time to buy gold with limited downside risk and tons of upside profit potential!


As many of our long time readers know, we’ve ridden the iShares Gold Trust (IAU) to large gains before.  In fact, the ETF gave us maximum gains of just over 41% in 2011 when gold shot to $1,900 an ounce.  We’re using the same ETF this time around due its attractive price and high intra-day liquidity.



As you can see in the chart above, IAU is exhibiting the exact same consolidative price action as the gold market it tracks.  Buying IAU at current prices allows us limited downside risk in this trade.  As a matter of fact, if IAU closes below $14.00 over the next few months, we will close this trade for a small loss.

However, the more likely outcome is that gold will regain its relative safety status and shoot higher in coming months!


iShares COMEX Gold Trust (IAU) is trading at $15.45.
Buy IAU up to $15.75 per share.
Our profit target is $20.00 or more.
Don’t forget your position sizing.

Commodity Review

Energy JJE $16.46 $14.80    +11.2%
Grains JJG $57.87 $45.50   +27.2%
Industrial Metals JJM $32.80 $33.12    -1.0%
Precious Metals JJP $84.64 $85.85    -1.4%
Softs JJS $62.81 $56.08   +12.0%
Livestock COW $28.60 $28.56    +0.1%
All Commodities DJP $41.47 $37.77   +9.8%


No doubt about it, the oil market has seen plenty of excitement over the past few weeks.  Positive European economic news sent crude soaring off the June 22nd lows of $78 a barrel.  In fact, oil jumped nearly $7 on June 29th, the biggest one-day gain of 2012!

But Europe’s progress isn’t the only factor causing crude’s rise…

Iran is causing problems again.  The rogue country failed to come to an agreement with the international community over their controversial nuclear program.  And now that an oil embargo is in full effect, Iran is rattling their saber.

As troubling as it may sound, it’s virtually impossible to know how the Iranian situation will play out.  Things may be ironed out smoothly or they may take a drastic turn for the worse.

But one thing’s for sure- regardless of the Iranian situation, crude at $80 a barrel is too cheap.  There’s simply too much demand on a global scale for oil to remain at these levels.

Unless the world economy is dragged into a recession, crude will likely revisit the high $90 a barrel mark by the end of 2012.

Since the iPath GSCI Crude Oil Index ETN (OIL) is beyond our buy-up-to-price of $20.00, let’s keep it at a hold.

Natural gas is perking up nicely as well…

The same heat wave that’s lighting up agriculture commodities is pushing natural gas higher as well.  As a matter of fact, natural gas briefly broke above $3.00 mmBtu in recent trading.  Not bad considering many energy ‘experts’ were predicting natural gas would fall below $1.00 this year.

UNL remains above our buy-up-to-price so let’s keep it at a hold.


As I stated in last Friday’s sell alert, the price of corn is seeing a phenomenal surge.  In fact, all the grains are soaring due the extreme heat in the Midwestern US.

But now that prices have risen so far (and so fast) it’s best to be a seller of grain commodities.  Weather based commodity rallies can reverse course quickly.  A couple days of drenching thunderstorms in the US Corn Belt could bring grain prices straight back down.

Bottom line…

We made a very nice trade in corn this year.  Let’s grab the nice gains while we have them.  If you haven’t already, make sure you close the trade in CORN.

Again, congratulations on a great trade!


Industrial metals were left searching for direction in late June and early July.
However, recent data out of China points to metals like copper and palladium gaining traction in coming weeks.

China’s most recent CPI reading shows inflation has dropped to the lowest level in 29 months.  As a result, the world’s largest consumer of copper will likely take steps to strengthen its economy soon.

If China announces a new form of monetary or fiscal stimulus in coming weeks, industrial metals like copper and palladium should benefit greatly.

Remember, supply/demand fundamentals are already bullish for these two metals.  All we need is a sign from China that their economy isn’t going to continue cooling.

JJC is beyond our buy-up-to-price, so I’m moving it to a HOLD.  However, if you don’t already have a position in PALL, now’s a great time to buy this undervalued metal.


Precious metals continued the same choppy trading they’ve experienced for months now.

But as I stated earlier in today’s report, the technical pattern that’s developing in the gold market is exactly what the yellow metal needs to regain its upward momentum.

See today’s report for more information…


Much like grains, soft commodities are seeing a heavy dose of buying as well.  For example, cocoa’s gone from $2,100 a tonne to over $2,300 in just the past few days… a 10% jump.

But the big move in cocoa prices is still ahead…

According to Rabobank, cocoa prices will likely jump to $2,600 a tonne by year-end. Analysts at the highly respected bank see supply worries mixed with the high likelihood of an El Nino weather pattern sending prices higher.

Of course, we’ve been expecting this scenario to play out for months now.  That’s why we’re long the iPath DJ-UBS Cocoa ETN (NIB).  Let’s keep NIB at a hold for bigger gains ahead…


Feeder cattle prices are diving thanks to the rally in corn.  As you may be aware, corn prices can have a big influence on the price of feeder cattle.


Yearling cattle are fed corn in feedlots across of the US.  Corn fed beef is known for its high fat content, and therefore more attractive flavoring and juiciness.

However, if the price of corn is surging, it means feedlot owners’ input costs are going to rise as well.  As a result, the demand for feeder calves drops as feedlot owners are unwilling to buy cattle at the high prices we’ve seen lately.

It’s interesting how price moves in one commodity can affect another!

Portfolio Changes

  • This month we’re adding gold (IAU) to the portfolio.  See above for all the details.

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.