Commodity ETF Alert June 2012 Issue

| June 12, 2012 | 0 Comments

CHINA’S STEPPING ON THE GAS…

A rapidly rising US Dollar has been a commodity headwind for months now.

European debt fears, along with worries of a global economic slowdown, have the dollar trading at its highest level since September 2010.

No doubt about it, the dollar’s recent strength has made it tough for commodity bulls.

But that may be about to change…

Recent global economic developments may finally be enough to stop the dollar’s insatiable rise.

What’s going on?

For months on end, there’s been worries over how Spain could keep its ailing banks above water.  But this past weekend, Spain received a $100 billion bailout of its banking system.

The monster loan from the European Central Bank (ECB) and the International Monetary Fund (IMF) should help ease worries of a Spanish bank run.

Now don’t get me wrong, last weekend’s bailout doesn’t solve Spain’s problems.  Nor does it address the uncertainty in Italy and Greece.

But the bailout does do something very important…

It gives investors confidence that the ECB and IMF are willing to do whatever’s necessary to avoid an economic catastrophe in Europe.  And I have no doubt these two powers will continue taking action to keep Spain, Italy, and Greece afloat.

But that’s not the only positive development…

China released some shocking news of its own last week.

After raising interest rates for the better part of 2010 and 2011, the People’s Bank of China (PBOC) announced they’re cutting interest rates 25 basis points.  The move will drop China’s benchmark interest rate from 6.56% to 6.31%- one quarter of a percentage point.

Why’s this a big deal?

Ever since embarking on a rate raising campaign in mid-2010 to combat rampant inflation, China’s GDP growth has slowly weakened.  As a matter of fact, after peaking in the first quarter of 2010 at 11.9%, yearly growth has slowly declined to around 8.1%.

Now don’t get me wrong, 8.1% growth would be remarkable for a developed economy like the US.  But for a developing economy like China, 8.1% growth is relatively slow compared to where it’s been in recent years.

Now that inflation is under control, China’s ready to shift growth back into high gear with their first rate cute since 2008.

And that means the country’s appetite for copper will grow…

As you may know, copper is an essential metal used in a slew of industrial applications.  However, the most common uses are in the construction industry. Copper wiring and plumbing is an essential component in construction projects around the world.

But listen to this…

Due to their rapidly growing cities and towns, China accounts for 41% of global copper demand.  And if the country is ready to kick economic growth back into high gear, they’re likely on the verge of taking a big dip into global copper supplies.

Speaking of copper supplies…

The London Metal Exchange reports stockpiles of the red metal held in exchange monitored warehouses are down 38% this year.  This reduction in supply is likely due to reduced capital spending efforts by global copper mining giants such as BHP Billiton(BHP) and Rio Tinto Group (RIO).

And that’s not all…

Long-term copper fundamentals are already strikingly bullish.  The International Copper Study Group (ICSG) recently projected world demand for refined copper will exceed production by about 240,000 metric tons in 2012.

The current supply deficit, combined with the fact the world’s largest consumer of copper is taking steps to stimulate economic growth, gives us a very bullish case for the red metal.

And that’s why now’s the time to get long copper!

Here’s how we’ll do it…

ABOUT COPPER

Many of our long time readers remember the iPath Dow Jones-UBS Copper ETN(JJC).  JJC is a great way to trade the copper market without exposing yourself to the undue risk of the commodities market.  JJC is an ETN designed to reflect returns potentially available through the unleveraged investments in copper future contracts.

TECHNICALLY SPEAKING

jjc61212

As you can see, JJC’s dropped substantially in recent weeks as European debt fears overwhelmed the copper market.  However, the red metal is currently trading for $3.33 a pound, a price not seen since December of last year.

As China’s recent easing measures work their way into the economy, we’ll likely see GDP growth accelerate and copper prices move higher.

 WHAT TO DO NOW:

iPath Dow Jones-UBS Copper ETN (JJC) is trading at $42.22.
Buy JJC up to $43.00 per share.
Our profit target is $50.00 or more.
Don’t forget your position sizing.

Commodity Review
 

COMMODITY TICKER CURRENT VALUE LAST MONTH CHANGE
Energy JJE $14.80 $17.18    -13.9%
Grains JJG $45.50 $46.67   -2.5%
Industrial Metals JJM $33.12 $35.82   -7.5%
Precious Metals JJP $85.85 $88.43   -2.9%
Softs JJS $56.08 $61.62   -9.0%
Livestock COW $28.56 $27.26   +4.8%
All Commodities DJP $37.77 $40.83   -7.5%

ENERGY COMMODITIES

Shortly after I sent out the special trade alert to buy the iPath S&P GSCI Crude Oil Total Return Index (OIL) early last week, crude jumped from $83 to $87 a barrel.  As a result, our position in OIL popped 3.6% from our entry price of $20.66 to an intraday high of $21.42.

But the bounce was short-lived…

Sellers overtook the market yesterday even though Spain received the $100 billion bailout of its banking system.  Monday’s selloff sent crude back near the June lows of $82 a barrel.

What’s that tell us?

European debt worries still have investors shaking in their boots.  And that nervousness likely won’t go away until after the Greek elections on June 17th.

But don’t let that scare you…

From a risk/reward standpoint, it’s still in our best interests to be long crude from these oversold levels.  We may see oil drop to the high $70 a barrel range if overseas news worsens, but I don’t see it dropping much further than that.

Of course, the one caveat is if Greece exits the Euro and sends global markets into a total meltdown.  If that were to happen, stocks and commodities would likely take a serious dive.

However, the odds of that happening are still extremely low. 

A Euro breakup would be a disaster for the global economic system.  I suspect the powers that be simply won’t let that disastrous scenario play out.

So for now, use the current weakness in crude as a buying opportunity.  If you haven’t already, buy OIL up to $20.66.

As far as natural gas goes, some weakness has entered the market in recent days. Remember, I wrote in the original trade alert that it was highly likely natural gas would test the $2.00 mmBtu level again.  I also said we should use the pullback to that support level as a buying opportunity.

Let’s wait for natural gas to actually test $2.00 before we move our UNL position back to a buy. For now, let’s keep UNL at a hold.

GRAIN COMMODITIES

While the recent strength in the US Dollar certainly isn’t helping grains, weather worries are starting to build.  And that means we should be close to seeing the upside we’re looking for in our corn trade.

Official data shows 42% of the Midwest is suffering from abnormally dry or drought conditions.  If dry conditions persist, it may mean a disruption to the rosy supply estimates forecast by the USDA.  And that’s just what corn bulls are waiting for.

Let’s be patient and keep our position in CORN at a hold until further notice…

INDUSTRIAL METALS

China’s recent interest rate easing is a clear sign the country will do what it takes to keep GDP growth above 8%.  And that means industrial metals like copper, palladium, and aluminum may be due for a bounce.

Why?

China’s a huge consumer of all these metals. Once their economy starts heating up again, we’ll likely see demand turn higher for these metals.

As you know, we’ve been long palladium (PALL) since December 2011.  I’ll admit, this trade is taking a little longer to play out than I initially thought.  But I think it will pay to remain patient with PALL.  The long-term supply/demand fundamentals are simply too bullish.

Let’s keep PALL at a hold and see if China’s recent interest rate decision kicks the metal into high gear.

PRECIOUS METALS

Precious metals got a boost when last month’s employment numbers were released a few days ago.  For the month of May, the US economy added a mere 69,000 jobs. That’s a major disappointment since economists expected jobs additions of at least 150,000.

The news sent gold and silver surging…

Why?

If employment numbers continue to weaken, Ben Bernanke and the Fed will be forced into additional quantitative easing measures.  Like it or not, there’s no way the Fed can stand around and do nothing while unemployment rates rise.

What’s that mean for precious metals?

Given the recent weakness in US economic data, along with the problems in Europe, it’s just a matter of time before gold and silver resume their upward trend.

I’m keeping a close eye on both these metals and you’ll be the first to know when it’s time to re-enter.

SOFTS

The past few weeks have been mixed for soft commodities…

Cocoa, cotton, and sugar saw substantial selling in late May as the US Dollar surged. But the first week of June brought buyers back into these markets as bullish fundamentals came into play.

In the case of cocoa, our only soft commodity holding in the portfolio, analysts are worried bean disease will put pressure on Nigerian cocoa supplies.  Of course, that scenario would benefit our NIB trade, which as you know, is based on the International Cocoa Organization’s projected cocoa supply deficit later this year.

Let’s keep our NIB position at a hold for now. 

LIVESTOCK

Cattle and hogs are the only commodities showing gains over the past month.

Feeder cattle are on a tear as the number of cattle on feed reported by the USDA came in much lower than analysts expected last month.  That has August feeder cattle contracts trading at a multi-month high of $1.60 a pound.

Portfolio Changes

  • This month we’re adding copper (JJC) 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.