Commodity ETF Alert May 2010 Issue

| May 11, 2010 | 0 Comments


The last two weeks have been wild… very wild.  Not only in the stock market, but in the commodity markets as well.

Markets have been all over the map as fear entered the marketplace a couple weeks ago.

What’s causing all this craziness?

It all boils down to Europe.  Europe is on the brink of financial disaster.  Member countries of the European Union (EU) are deeply in debt.

After years of excessive spending, the bill is now coming due for many countries.

The problem is they can’t pay it…

Investors are beginning to realize their balance sheets do not add up.  Countries like Greece are not able to issue new debt to fund government activities.

Once sovereign countries enter this realm of economic distortion, things can get ugly quickly.

This is what sent the markets falling last Tuesday.

The selling momentum culminated in a nearly 1,000 point plunge in the Dow last Thursday.

Now there are a few theories as to what actually caused the plunge in the markets on Thursday.

Some are saying it was due to a “fat-fingered” trader.  Others are saying it was due to the situation in Greece.  Still others say it was due to high frequency trading (HFT) computers gone wild.

Regardless of the cause, it sent commodity markets on a wild roller coaster ride…

Some commodities were sent down like a rock off a cliff.  Others were like rocket ships blasting into space.  It truly was a volatile scenario for investors everywhere.

When investors get panicky, it’s important not to make rash decisions…

That’s why we sent out the special update last Friday.  We wanted you to sit tight until we had a chance to examine our positions.

The weekend gave us the time to put everything in context.

Markets entered the weekend on shaky ground.  Investors were “waiting on bated breath” to see what happened with the situation in Europe.

And thankfully the situation improved dramatically…

The EU and the IMF put together and absolutely massive “rescue package”.  Around $1 trillion (720 billion Euro) will go towards backing EU countries with unstable balance sheets.

The rescue package had to restore confidence in the Euro.  Otherwise, the European Monetary Union (EMU) may have collapsed.

What does this news mean for the commodities space?

Commodities across the board rallied on the news Monday morning.  It means investors have confidence in the EU rescue package.  They are confident the global economic recovery will remain intact.

The debt fires have been extinguished for the time being, but unfortunately risks still remain.  The next few months are very important for European and world markets.

The recent market panic sent industrial metals down heavily in recent weeks.

And it sets up our entry into this month’s recommendation…

Copper prices were sent into oversold territory recently.  The sell-off gives us a chance to buy copper at a nice discount.

We’ve been in copper before.  Back in April 2009, we nailed a 50% gain.

So why is copper a good investment at these levels?  I’ll get to that in a minute…
First let’s do a quick rundown of copper.

Copper is an industrial metal with many uses.  The most prevalent use is as a building material.  Copper is very malleable and is commonly used in piping and wiring.

It’s also widely used in refrigeration and air conditioning equipment.  The malleability of the metal makes it ideal for these uses.

And one country has a voracious appetite for copper…. China.

It’s no secret China is booming.  Their economy is growing by leaps and bounds.  Their building industry is without a doubt the strongest in the world.  Their demand for raw materials, such as copper, is unprecedented.

But some say the Chinese economy is growing too quickly.

In fact, China has recently been taking steps to slow down its building industry. They’re tightening lending requirements for borrowers.  They’re also tightening bank reserve requirements.

They don’t want to stop building all together, but they do want to control the speculative side of the equation.  They want to avoid a speculative real estate bubble.

China is doing the right thing by putting in these lending curbs.

So where does that put copper prices?

Along with the scare out of Europe, demand concerns out of China sent copper prices tumbling in recent weeks.

But by looking at the medium to long term demand fundamentals for copper, we see a different picture.

According to Bloomberg, China’s copper imports are increasing. In fact, copper imports have increased 9% year over year. China imported 436,345 metric tons of copper in April.

This is down slightly from imports in March, but it’s up 9% from the prior year’s import of 399,830 metric tons.

So we’re seeing some short term demand volatility in copper.  But in the long run, demand is increasing.

Demand for copper and copper products remains high…

Another demand indicator for copper is premiums paid by Chinese copper importers.  In recent weeks, the premium paid over the cash price for copper increased to $70-$100 per ton.  Last month the premium was in the $60-$80 range.

This increasing premium rate means importers have to “pay up” to get their hands on the metal.

In my opinion, the economic growth picture for China is solid.  Even after their recent actions to curb lending.  The growth rate may slow a bit, but it will still be one of the highest in the world.

The recent pullback in copper prices gives us a chance to buy back in to the long term up trend for copper prices.

The big money is still bullish on copper…

The most recent Commitment of Traders (COT) report shows institutional money is still bullish on copper.  Long copper positions for swap dealers and managed money are still higher than that of short positions.

Long positions had decreased as of May 4, 2010.  But we suspect this will change on the release of the next report this Friday.

The COT report is a weekly report of producers as well as institutional market participants.  The report shows how the “smart money” is investing.

The bottom line is this…

The Chinese growth story is still intact.  Demand for copper and copper products are likely to remain at high levels.  The recent pullback is a buying opportunity.  It gives us a chance to invest with the long term trend, which is still UP for copper.


The iPath DJ-UBS Copper ETN (JJC) is an ETF tracking the price of copper.  JJC is a sub-index of the Dow Jones-UBS Commodity Index Total Return.  It reflects the returns potentially available through an unleveraged investment in the futures contracts on physical commodities.

The index currently tracks the Copper High Grade futures contract traded on the Comex.


Take a look at the chart…


As you can see, JJC is in a long term uptrend.  The recent pullback in prices put JJC at its 200-day moving average.  Institutional investors use the 200-day moving average as a low risk buy point.


The iPath DJ-UBS Copper ETN (JJC) is trading at $43.72.
Buy JCC up to $44.25 per share.
Our profit target is $50.00.
Don’t forget your position sizing.

Commodity Review

Energy JJE $23.26 $24.73   -5.9%
Grains JJG $35.18 $34.78 1.2%
Industrial Metals JJM $38.74 $43.47   -10.9%
Precious Metals JJP $63.01 $61.16   3.0%
Softs JJS $41.22 $43.76 -5.8%
Livestock COW $30.91 $30.15   2.5%
All Commodities DJP $39.27 $40.59 -0.2%


Energy commodities were sold with reckless abandon last week.  Economically sensitive commodities such as crude react poorly in economic situations where demand for crude could drop.  The European crisis is one of those cases.

However, we recommend you hold the position in Crude Oil (OIL).

The recent announcement of the rescue package for Europe should restore confidence in the markets.  Crude oil is currently trading at around $77 a barrel.  Oil should be able to regain the $80 a barrel mark in coming weeks.

However, the problems in Europe will continue to create uncertainty in the markets. It’s unlikely crude oil will break the recent highs for the foreseeable future.

With that in mind, we’re lowering our profit target to $27.50 from our previous target of $32.50.

Our position in Gasoline (UGA) was doing perfectly… right up until the European mess hit the headlines.  Last week, UGA hit the support line of its up-trending trading range.

Given the current economic environment, UGA isn’t likely to break its recent highs.  The events of the last two weeks are making energy investors very skittish.  UGA will likely remain volatile in coming weeks.

Let’s hold our position in UGA.  But we’re lowering the price target for UGA to $40.00 from the previous price target of $45.00.

UGA should bounce back from its short term oversold condition.  But we don’t think UGA will be able to breakout above the previous highs.


Our trade in JJG is holding up nicely.  Even during the market panic last week, the grains complex held up extremely well.  Yes, we saw a little bit of selling, but nothing compared to some of the other economically sensitive commodities.  Let’s stick with our trade in JJG.


Recently, industrial metals fell like they were thrown out of an airplane.  This is creating a good buying opportunity.

These metals are directly linked to expectations of global economic strength and weakness.  Due to the uncertainty the last few weeks, investors dumped these metals.  But the massive rescue package from the EU should give them an opportunity to continue their uptrend.


Here it is folks.  This may be the last time we see gold under $1,200 an ounce.  The European crisis sent gold rocketing back to the highs from December of 2009.

We are sitting pretty with our Gold position (IAU).  We entered this position at $93.75 in the middle of 2009.  Your patience is paying off in spades.

Expect gold to remain volatile in coming months.  But we should see higher prices by the end of the year.

Silver is approaching the highs of 2009 as well.  If silver can break through the 2009 highs, it could literally turn into a rocket ship.  Why?  Because the gold/silver ratio is currently around 66.

During the last huge run-up in gold prices in the early 1980s, the gold/silver ratio was around 17.

That means silver is currently undervalued relative to gold.  IF gold continues to rise, silver will eventually have to play “catch up”.  The next few months could be very interesting for silver investors.


Coffee’s been stuck in range bound trading the last three months.

Cocoa saw a brief surge last month.  But now it’s being sold again due to the market uncertainty.

Sugar continues deflating back toward the lows from late 2008.  Sugar inventories are forecasted to rise.  Production rates are increasing in countries like Brazil and India.  At some point in the near future, sugar will be in the “sweet spot” for investment.


Cattle prices continue to push higher.  Cattle prices dropped so much in the last two years and many cattle producers held back animals from the market.

This effect eventually brought on a shortage of animals in the feedlots.  Now prices are rising. We should see a flood of cattle coming back into the sale rings soon.

Portfolio Changes

  • This month we’re adding Copper (JJC) to the portfolio.  See page 6 for all the details.
  • Lower the profit target for Crude Oil (OIL) to $27.50.  See page 7 for details.
  • Move Gasoline (UGA) to a HOLD.  Lower the profit target to $40.00.

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.