Commodity ETF Alert June 2009 Issue

| June 5, 2009 | 0 Comments

Back in January I was looking at a market gripped by fear.

We were afraid of a market collapse.

We were afraid of a run on the bank.

Headlines fanned the flames of fear.  Fear of a global recession, devalued currencies, and another Great Depression.

The thoughts became whispers.  Whispers became talk.  And eventually all the fear talk caused markets to plunge to new lows.

Everyone was afraid of losing money.

In January, I suggested taking a position in Gold to profit from these fears.  I had no idea then how right I’d be.

Only a few weeks after making my recommendation, the value of gold skyrocketed.  It briefly reached $1,000 an ounce.  Our gold trade gave us a fat 17% gain.

Most of these fears are old news now.  Who hasn’t worried about a global recession? While the old fears fall by the wayside, new ones are starting to emerge.

I hinted at one of those fears back in January.

What should everyone be afraid of now?

I can state it in one word:  Inflation.

Inflation, for those who don’t know, is the increase in prices.  Inflation is what causes goods and services to cost more and more.  Think back to the time of your grandparents… I’m sure they have stories about bread costing a nickel, or apples being eight cents a pound.

Today’s higher prices are the result of inflation.

Now, inflation’s not always bad.  I like to compare it to the childhood fable of Goldilocks and the Three Bears… “It’s not too hot, it’s not too cold, It’s just right.”

That’s the way inflation needs to be.

Not too high, not too low, but just right.

The risk of inflation.

If inflation heats up too quickly, bad things start to happen.  Prices start to increase at a faster and faster pace.  This destroys the purchasing power of local currencies.

Hyperinflation becomes a real concern.

Hyperinflation is when inflation rates exceed 50% per year.  Before you dismiss this thought, realize hyperinflation hit Germany in the 1920s.  At one point, people needed a wheelbarrow of currency just to buy a loaf of bread.  We’re seeing hyperinflation now in the country of Zimbabwe.

Could hyperinflation hit a developed country like the US?

Central banks all over the world are responsible for controlling inflation.  It’s their primary objective.

Up till now, most countries have controlled inflation effectively.  However, in the coming months the US government is going to really struggle.  Ben Bernanke, the Federal Reserve Chairman, is going to have his hands full.

Let me tell you why…

For the last year or so, the US government’s been flooding the market with US Dollars. And, as any Economics 101 class will teach you, rising supply causes prices to fall. We’re seeing it right now with the US Dollar.


The purchasing power of the US Dollar is being destroyed.

As the US Dollar falls in value, American made goods become very inexpensive overseas.  Foreigners buying US products are able to pay less.  This is especially true for hard assets.  A low dollar means foreigners can bid up the price of Real Estate, Oil, Natural Gas, Gold, and other hard commodities.

As prices get bid up, inflation takes hold.  Then suddenly nobody wants to own your currency and the problem accelerates.  I said it best back in the January issue:

When a currency devalues, it buys fewer goods.  Food prices can literally double overnight.  Imported goods become more expensive. Are you going to sit idly by as it happens?  Of course not.

What’s the solution?

The US government could prevent the coming inflation.  But that would mean shutting down their aggressive spending.  They’d need to stop printing money and start reclaiming the dollars already thrown into the system.

I think you’re more likely to be struck by lightning than see that happen.

The sad truth is we’re going to see inflation creep back into our daily lives.

I’m already seeing it.

Just look at commodity prices.  Three months ago, oil was selling for around $35 a barrel.  Now it’s nearly $70.  Copper prices are up.  Grain prices are up.  Gasoline prices are up too.

It won’t be long before we’re all paying more at the grocery store and the gas pump.

Folks, that is inflation in action.

Now officially, inflation doesn’t exist until the US government recognizes it.  I’m sure you’re already seeing it like I am.  Once the government catches up with the rest of the real world, they’ll show inflation as an increase in CPI numbers… just give it time.

Once they announce CPI numbers heading higher, we’ll see everyone start to worry more about inflation.  And in my mind, that will cause Gold prices to rocket higher.

Now, I’m not the only one thinking this way.

Other “smart investors” are moving significant assets into gold.  According to the Wall Street Journal, some are buying the metal itself.  Others are buying the gold producers.  And still, others are picking up gold futures.  The more active funds include Paulson, Greenlight, Eton Park, Haymen and Blue Ridge.

It’s nice to see other smart investors thinking the same way.


We talked about this last time… the best way to invest in gold is through ETFs.  The ETF I like the best is iShares COMEX Gold Trust (IAU).

These ETF shares represent a piece of ownership in the physical gold the trust holds in storage.

This ETF matches the underlying commodity very closely.  However, tracking errors and expenses may cause the actual ETF to be slightly different than the going rate for gold.  This is a nominal amount, but worth noting.


Last time around, we were buying gold much lower.  We exited as it neared $1,000 an ounce for a substantial profit.  Today’s a bit different.  Gold’s now trading around $960 an ounce.  However, inflation hasn’t started showing up yet in the CPI numbers.  Once it does, we’re off to the races!


Gold’s heading for a retest of the $1,000 highs.  A breakout above those levels will carry gold prices significantly higher.

We’re well above the 50-day moving average, and the MACD is also showing a positive upslope.  We’re nowhere near the overbought readings we saw the last time gold tested the $1,000/oz resistance level.

I think we could see gold surpass prior highs, and our IAU ETF should reach the $115- $120 level in no time.


The iShares COMEX Gold Trust (IAU) is trading at $93.75.
Buy IAU up to $96.00 per share.
Our Profit Target is $118.00.
Don’t forget your position sizing.

Commodity Review

Energy JJE $26.96 $24.71 +9%
Grains JJG $46.20 $43.20 +7%
Industrial Metals JJM $28.35 $27.19 +4%
Precious Metals JJP $51.42 $48.17 +7%
Softs JJS $41.61 $41.00 +1%
Livestock COW $28.21 $30.69 (8%)
All Commodities DJP $38.48 $36.65 +5%


Energy prices are jumping higher… didn’t I start last month’s update the same way?  Oil continues moving up, up, up!  We touched the $70 level.  That’s a double in price from the lows just a few months back.  Great news for our Oil trade.  We’re up almost 34%!

I still think we have room to run on this one.  We might pull back in the short term to consolidate gains.  However, some OPEC countries are whispering about driving oil to $80 a barrel.

Surprisingly, Natural Gas isn’t following Oil’s lead.  It’s up off the lows, but hasn’t quite made the big jump higher.


The Grains are a big component of commodity prices moving higher this month.  Credit concerns, Argentina harvest levels, and wet weather all pushed the entire complex up significantly!  Great news for us.

Our Grains position hit a new high this week of over $47!  This recent price action takes the trade over the price target.  If you haven’t already, take a moment to exit your position.  Congratulations to everyone on a gain of more than 27%.


The Industrial Metals market has been moving higher this month.  Growing Chinese demand for metals seems to be the focus of traders right now.

Copper, in particular, was a hotbed of activity.  Chinese stockpiling is helping keep prices above the $2 a pound level – a very bullish sign.  Our Copper trade is moving slowly higher.  This run is far from over.  All the technicals look good for a long term run in the commodity.


Gold is once again leading the group higher.  This month it peaked above $970.  I think it’s gearing up for another run at the $1,000 level.  See today’s trade recommendation for more information.


The Softs were relatively unchanged this month.  Cocoa, however, was all over the map in trading.  Like juggling a hot potato, cocoa prices rallied one day on falling supply.  Then they fell on expectations of dropping demand.

Coffee continued its run, reaching a seven month high.  New demand from the brew-it-at-home group is pushing prices higher.  This upward move comes despite falling demand because of the recession.


Is this a sign of the apocalypse?  The two largest hot dog manufacturers (Sara Lee and Kraft Foods) are now embroiled in a major lawsuit.  Their beef?  Which dog tastes better.

If you ask me, it’s a no win situation for both companies.  The only ones profiting from this argument is the lawyers.

I’m still expecting Lean Hog prices to move higher.  Unfortunately, our trade last month (COW) moved lower.  I’d give this trade some more time to develop, we’re still at the start of grilling season.

Portfolio Changes

  • This month we’re adding iShares COMEX Gold Trust (IAU) to the portfolio.
  • We’ve hit the price target on our Grains trade… take your profits now. Congratulations on a 27% profit!

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.