Commodity ETF Alert June 2010 Portfolio Update

June 22, 2010

The commodities horn is sounding an alarm…

There’s a low hum coming across the Atlantic right now.

The world community is coming together to play soccer.  The South Africa World Cup has soccer fans in a worldwide frenzy.  Teams and fans are coming from afar to decide the best in the world.

Yet, some of the biggest news coming out of the World Cup isn’t from soccer… it’s from a little plastic horn.

The “vuvuzela” as they’re called, are quite possibly the most annoying invention known to mankind.  These horns produce such a racket I wonder why officials allow them in the first place.  Do soccer fans use these horns to support their team or deafen their opponents?

My only hope is these horns don’t jump the Atlantic and show up at sporting events here in the U.S.

On a more serious note, there’s another horn sounding right now…

Actually, it’s more like a warning siren… and it’s coming from the commodities markets.  If investors are wondering what the future of the U.S. housing market may look like, take a look at lumber prices.

Lumber prices have fallen off a cliff in recent months.  In fact, it’s down over 40% since mid-April.  This points to falling demand for lumber as builders aren’t so sure about the future of housing.  New home starts came in lower than expected in a recent report.

Many analysts are pointing to a double dip in the U.S. housing market…

If the housing market continues to fall, we have to ask ourselves about the economy in general.  Will the economy be able to stay afloat?  Or will it follow the housing market into a double-dip recession?

These are questions we have to ask ourselves as commodity investors…

Why?  Because commodities would be impacted severely by a double-dip recession.  Falling demand, as well as risk aversion on the part of investors, would send some markets plummeting.

If we do get a double dip, it’s best to step aside and let the commodity markets reset. We’ll come in once the damage is done and pick up commodities at bargain prices.

But if the economy can hold on and continue to grow, we’ll be positioned for that as well. It’s just going to take a little time to see which one we’re going to get.

Position Updates

. . . . iPath S&P GSCI Crude Oil Total Return ETN (OIL) – HOLD

Crude oil is volatile as usual.  It’s rallying all the way back up to near $80 in recent action. As you know, this is up nearly $10 from just a short month ago.

There are many fundamentals driving crude.  The recent scare out of Europe sent crude oil down in a flash.  But now investors are bidding it back up as debt fears subside.

Crude is going to remain volatile in coming months.  There’s no doubt about it…

The constant barrage of economic news will certainly influence investors.  But geopolitical news may be what sends oil to new heights.  The recent news on the crossing of 12 U.S. warships through the Suez Canal will keep oil investors on edge.

While no one knows the true intention of this move, it does raise the possibility of confrontation with Iran.  A buildup of U.S. military hardware in the region has caught the attention of the oil market.

Hopefully, nothing comes of this and the situation with Iran is resolved peacefully.  But if it is not, you bet your bottom dollar crude oil is going to surge.

Even with all the uncertainty in the economy, we need to stay long oil…

We said in the last update to hold our position in OIL as long as the price didn’t go below $20.  Let’s continue this same game plan going forward.  As long as our OIL ETF stays above the $20 level (which corresponds to around $68 in crude), let’s stay long.  However, if crude collapses, we have to control our downside risk.

We can’t afford to ride crude oil down to new lows…

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

Silver is testing the multi-year highs in recent action.  This is a good sign for silver as investors are willing to buy at these levels.  However, we may get some extreme volatility in silver over the next few weeks.

Remember, silver is notoriously volatile…

But we want you to hold through any volatility coming our way.  Silver prices are heading much higher in coming months.  We don’t want to get shaken out of our position due to a little short-term volatility.

Keep holding silver for further upside…

. . . . iShares COMEX Gold Trust (IAU) – HOLD

Gold is seeing quite a few days of trading at all time nominal highs.  But remember, the inflation-adjusted highs for gold are well above where we are now.  In fact, the inflation adjusted high is around $2,000 an ounce.

We feel the run-up in gold so far is not due to inflation.  Gold is holding these high levels due to worries over sovereign debt.

But once inflation does kick in… which it will at some point, gold is likely to test the inflation-adjusted highs and shoot right past them.  We want to make sure we’re around to catch these gains when they happen.

However, gold, like silver, could see some volatility in the short term.

But keep holding the position in IAU for further upside.  We want to take full advantage of the run-up in gold.

. . . . United States Gasoline Fund (UGA) – HOLD

As you know, our position in UGA is similar to OIL.  We got the snapback rally we were looking for last month in UGA.  Due to the strong correlation between OIL and UGA, we have a lot of exposure to oil prices.

With all the uncertainty out there, let’s manage our risk in this position…

UGA has rallied from $31 up to over $35 in recent days.  Let’s hold UGA for now, but sell it if it closes below $33.  This gives us a little wiggle room if UGA can head higher from here.  But it also gets us out of the position if crude oil prices head dramatically lower.

. . . . iPath DJ-UBS Sugar (SGG) – HOLD

We got a good entry in SGG in our last trade alert.  Everybody should’ve had ample time to get in under our buy up to price of $44.  Like we said in the trade alert, sugar has great long-term fundamentals.  Getting in at these low prices puts the odds in our favor for future gains.

While the short-term drivers for sugar prices are subdued, the sugar market did see some speculative buying in recent days.

We’re positioned well in sugar, but patience will be required.  Hold tight.

Category: Commodity Trading