Commodity ETF Alert June 2013 Issue

| June 11, 2013

 

A LOW RISK TRADING OPPORUNITY IN GOLD…

Without question, gold is one of the worst performing commodities of 2013.

The yellow metal plunged from $1,600 at the start of the year, all the way down to $1,325 in mid-April.

That’s a mind-blowing 18% drop in a year many enthusiasts believed gold would fly over $2,000 an ounce.

As you know, we avoided gold’s swan dive in the Commodity ETF Alert portfolio…

We closed a long trade in the metal at breakeven in February- long before this market went haywire.

We also sat on the sidelines as gold crashed over the past two months.  Even though the metal looked completely oversold multiple times, a long trade was just too risky.

But now we have an opportunity…

A technical pattern is forming in gold that will allow us to enter this market with limited risk.

What’s more, bullish fundamentals are coming into play now that the yellow metal has dropped so far in price.

So let’s get to it.  Here’s why gold is finally presenting a solid, low-risk trading opportunity for bulls…

First, a chart…

Gold Chart

As you can see from the green lines, gold is forming a basing pattern.  After the big drop in April, the metal used the washout low -$1,350- as an area of technical support to bounce in mid-May.

The $1,350- $1,375 area is a great technical point to get long gold…

Why?

If the yellow metal closes below $1,350, we’ll immediately know we’re wrong on our bullish call.  In other words, the downside risk is very limited.

On the other hand, if gold rallies from the $1,350 support zone, we will have picked up the metal at its cheapest point in years.

And given some new bullish fundamental developments, we could see gold rally back above $1,500 by year-end.

So what are these bullish developments?

First of all, gold production costs are surging.  As a matter of fact, Barrick Gold’s (ABX) all-in sustaining cash costs came in at $945 an ounce in 2012.  That’s up sharply from $650 in 2010 and $750 in 2011.

As you may know, Barrick is one of the biggest and most efficient gold miners in the world.  If their costs are jumping by 15-20% year-over-year, you can be assured that others in the industry are having the same problem.

In fact, Goldcorp (GG), another behemoth of the gold mining industry, reported similar rises in year-over-year all-in costs.

What do rising costs mean for the price of gold?

Quite simply, the farther gold falls, the less profitable gold miners become.  And the less profitable they become, the more they will curtail production.  In other words, miners won’t produce more of the metal when production costs are rising and market prices are falling.

The price of gold can only fall so far before producers start throwing in the towel on projects.  And lower gold production means lower global supplies.

This is a very bullish new development for the long-term price of gold.

But that’s not all…

Another new bullish factor for the yellow metal was announced just a few days ago.

The China Securities Regulatory Commission recently approved the formation of two domestic gold-backed exchange traded products (ETPs) for Chinese investors.

That’s right, the same gold-backed ETFs that have been a smashing success in the US and Europe will now be available in China.  And in case you’re unaware, gold is an extremely popular investment in China due to the country’s inflation problems.

China’s physical gold backed ETPs will provide a huge new source of gold demand.

So there you have it…

Gold miners can’t withstand much more downside in the commodity before they start shutting-in mines.  What’s more, new Chinese gold ETPs are about to create a huge new source of demand for the yellow metal.

Even though it may seem irrational to be bullish given the sell-off in recent months, the supply/demand fundamentals for gold are quietly getting stronger.

And given the technical setup in the chart above, we have an outstanding, low-risk entry point to take advantage of it!

ABOUT GOLD

As you may know, the iShares Comex Gold Trust (IAU) is a low cost, yet effective way to get long the gold market.  If the price of gold rises, so will IAU.  Shares of this ETF entitle the owner to a percentage ownership of physical gold held by the trust. The physical metal is held in trust vaults located in Toronto, New York, and London.

TECHNICALLY SPEAKING

IAU Chart

As you can see, IAU is forming the exact same pattern as the spot price of gold.  The April low in IAU is $13.20, so that’s where our line in the sand will be for this trade.

Any price between $13.55 and $13.20, IAU is considered a BUY.

However, if IAU closes below $13.20 over the next two weeks, we will have to close this trade to control downside risk.  After all, we are going against the trend of the overall gold market with this trade.  If gold breaks lower, we don’t want to ride it down.

WHAT TO DO NOW

iShares Comex Gold Trust (IAU) is trading at $13.46
Buy IAU up to $13.55 per share
Our profit target is $16.00 or more

COMMODITY REVIEW

COMMODITY TICKER CURRENT VALUE LAST MONTH CHANGE
Energy JJE $17.34 $17.50    -0.9%
Grains JJG $51.39 $50.90    +1.0%
Industrial Metals JJM $30.17 $30.62    -1.5%
Precious Metals JJP $70.33 $73.43    -4.2%
Softs JJS $47.49 $50.58    -6.1%
Livestock COW $26.37 $25.91    +1.8%
All Commodities DJP $38.39 $38.92    -1.4%

 

ENERGY COMMODITIES

WTI crude is still stuck in a volatile trading range between $92 and $96.  As you know, the underlying fundamentals for oil have become increasingly bearish over the past few months.  Thanks to the US oil shale revolution, inventories are sitting near multi-decade highs of 391million barrels.

However…

The summer driving season is fast approaching.  That means demand for crude will rise substantially in coming months.  What’s more, Middle East tensions are still simmering and could go into full boil at any moment.

For that reason, it’s best to steer clear of oil until this market breaks out in either direction.  A push above $98 may give bulls the momentum they need to take crude over $100.  On the other hand, a break below $92 and WTI could trade in the mid- to low- $80 range by Fall.

As far as natural gas goes…

A huge EIA inventory build took the price of this commodity steeply lower last week. For the week of May 31st, inventories rose 111 billion cubic feet (bcf).  That’s well above the average analyst estimate for 88 bcf of storage additions.

Natural gas is now a weather trade.  Hot temperatures over the next few months will make the price rise, while cool temperatures will likely keep a lid on the market.

Considering the enormous inventory build last week, the new floor for natural gas is likely in the $3.50 area.  That’s 25 cents lower than my estimate from last month.  If natural gas drops to that area, consider it a strong buy.

For now, keep your position in the US 12-month Natural Gas (UNL) at a hold.

GRAIN COMMODITIES

Grains are waiting on a very important USDA WASDE report due out tomorrow, June 12th.  Investors will be looking for any changes to the USDA’s ending stocks estimate for corn, soybeans, and wheat.

There’s no trade in grains until this data comes out.

INDUSTRIAL METALS

Industrial metals are still a tough trade.  Even though copper is up nicely since the lows set in late April, weak Chinese economic data makes further gains unlikely.

For example, China released industrial production data last weekend.  May industrial output rose 9.2% year-over-year, less than analysts’ expectations.

Until Chinese economic data heats up, it’s best to stick to the sidelines on industrial metals.

PRECIOUS METALS

Palladium was the clear winner in the precious metals space last month.  At the current price of $770 an ounce, the metal is up 8% from the May 10th closing price of $710.  Strength in palladium is due to a recent rise in South African mining industry uncertainty along with overall bullish supply/demand fundamentals.

For now, keep your position in the ETFS Physical Palladium Shares (PALL) at a hold.
We may see a profit-taking pullback in the near future, but palladium will likely break to new 52-week highs by Fall.

As far as platinum goes, the price of the metal continues to firm.  In fact, the rare metal is up nearly $50 an ounce from the mid-May lows.  We’re currently up around 2% from our official buy price in iPath DJ-UBS Platinum (PGM).

Much like palladium, higher prices are likely coming for this metal.  Keep PGM at a hold until further notice.

SOFTS

Cocoa is back on the move higher!

After a few weeks of profit taking, the soft commodity is back above $2,300 a tonne. That has us sitting on gains of just over 4% in iPath Pure Beta Cocoa (CHOC).  But once year-end holiday demand starts picking up, cocoa should achieve the $2,500 level.

Let’s keep holding CHOC for further upside.

Coffee and sugar are still stuck in brutal downtrends.  Abundant global supplies have bears in firm control of these markets.

LIVESTOCK

Lean hogs are up strongly in recent trading thanks to quickly increasing demand for pork.  As the summer grilling season arrives, it appears consumers are trading down to pork from more expensive beef.

What’s more, China recently purchased US based Smithfield Foods for $4.7 billion.  The takeover of the pork producer has hog investors believing US exports of the meat to China are on the verge of skyrocketing.

Portfolio Changes

  • This month we’re adding gold (IAU) to the portfolio.

 

Category: Commodity Trading

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