Commodity ETF Alert March 2013 Portfolio Update

 

European Uncertainty Further Elevates US Dollar…

Unfortunately, just when the US Dollar was ready to turn lower, a new round of European debt worries popped up out of nowhere.

As you’ve likely heard, the Mediterranean island nation of Cyprus is now embroiled in a debt crisis.  While the country’s problems are pale in comparison to Greece, Spain, and Italy, the sudden arrival of fearful bailout headlines sent investors scrambling to the safety of the US Dollar.

The greenback turned higher yesterday once investors learned Cyprus secured a European Union bailout at the expense of large individual bank accountholders.

According to various reports, Cyprus bank accounts holding over 100,000 euro will be subject to a enormous one time 20-30% levy.  In return, Cyprus will secure essential bailout funds from European lenders, staving off a potential collapse of the tiny island’s banking system.

Why would the dollar rally on such news?

While the Cyprus bailout is tiny in the grand scheme of things, it creates a scary precedent.  Should larger European countries (like Spain or Italy) need a bailout, European lenders may look for similar draconian terms.

Such a scenario has the potential to create bank runs out of troubled countries and into safer ones.  Not surprisingly, investors ran from the Euro and straight into the arms of the US Dollar on yesterday’s news.

Bottom line…

Cyprus debt fears will likely lend additional strength to the greenback in the short-term.  As a result, don’t be surprised to see continued general weakness in commodities for a while longer.

However, don’t let this deter you!

Commodities are remarkably under-owned by institutions right now.  But once the dollar turns to the downside (which it eventually will), I expect large inflows into specific hard assets.

We just have to remain patient until that time comes.

Let’s take a look at our open positions…
 

Position Updates

. . . . PowerShares DB Multi-Sector Metals Fund (DBB) – SELL

No doubt about it, industrial metals have taken a beating recently.  In fact, copper set a new multi-month low of $3.40 last week… clearly not what we’re looking for.  With so much optimism surrounding the stock market and the global economy, it’s surprising to see the red metal so unloved by investors.

What’s going on?

Well, to put it simply, copper producers are making up lost ground.

Supplies of the red metal have grown to 565,000 tons at warehouses monitored by the London Mercantile Exchange.  That’s one of the highest supply levels since October 2003.

So even though the US housing market is coming back with a vengeance and the Chinese economy is still growing at a near 8% pace, it looks as though copper prices will remain under wraps in 2013.

As a result, let’s close our trade in DBB.  There are better profit opportunities available to us in the commodity space in coming months.  Go ahead and sell DBB at current prices.

. . . . iPath Pure Beta Cocoa (CHOC) – HOLD

Cocoa gained a bit of ground in recent trading.  In fact, the commodity rose to just shy of $2,220 a ton last week as investors waited for West African production reports.

The next month will be very telling for the cocoa market.  If this year’s harvest is weaker than analysts expect, we should see bulls start rushing into the cocoa market.

We’ve had plenty of time to buy CHOC on the cheap.  As a result, I’m moving CHOC to a hold.  Keep holding for higher prices.

. . . . ETFS Physical Palladium Shares (PALL) – HOLD

Palladium took investors for a wild ride last week.  As you’re aware, the precious/industrial metal dropped over $30 an ounce during Tuesday’s trading session.

What caused that sharp one-day drop?

Most likely it was just a quick bout of fear-based selling surrounding the Cyprus uncertainty.  Whatever it was, it shouldn’t cause us any problems going forward. Palladium’s supply/demand metrics strongly favor higher prices this year.

In fact, prices have already rallied right back up to $760 an ounce (a one-day $25 pop) on Wednesday and have been there ever since.

For now, let’s keep holding our PALL position for higher prices.

. . . . iPath DJ-UBS Sugar (SGG) – Buy up to $67.32

Sugar came very close to kicking off a dramatic rally on March 15th.  However, early gains on the day eventually turned into losses as investors sold on Cyprus fears.

Take a look…

Due to the failed breakout, sugar is dropping back down to test the 52-week low of 17.75 cents per pound set in mid-February.  The price of the sweet commodity should stabilize at these levels.

The bullish situation I spoke of in the last trade alert is still in play.  If you haven’t already, go ahead and buy SGG up to $67.32.

 

Category: Commodity Trading