Commodity ETF Alert May 2011 Issue

| May 10, 2011 | 0 Comments


Commodity market action has been crazy over the past week.  A broad sell off sent many commodities to multi-month lows.

The silver market started it all off…

The precious metal hit 30-year highs at the end of April.  It was just a few cents from breaking above the $50 an ounce mark.

But then the Chicago Mercantile Exchange (CME) did the unthinkable…

They raised margin requirements for Comex silver futures by 84%… an unheard of event.

The new margin requirements quickly forced small futures speculators out of the market.  And it wasn’t long before silver was plunging.

But then the weakness spread…

Gold… then oil… then natural gas.  One by one, commodities futures fell across the board.  In the end, nearly every commodity endured a solid one-week sell off.

In oil’s case, the sell off was extreme…

WTI crude dropped from $114 a barrel to $99, a staggering 13% drop.  A steep short-term decline like this is an obvious sign of panic selling.

So what’s the deal with all this selling?

The intense selling can, in part, be blamed on commodity futures speculators being forced to raise cash.  Quickly rising margin requirements have a way of forcing them to adjust positions.

But the sell-off can also be credited to a quick rally in the US Dollar…

For months now, the US Dollar has been sinking.  Investors have been shunning the world’s reserve currency.


The US Federal Reserve is continuing its all out assault on the dollar.  Running the printing press 24/7 is pushing the dollar’s value lower and lower.  The Fed’s weak dollar policies are a big reason for the long-term strength in commodities.

But last week the dollar did an about face.

Investors were buying up the oversold dollar, driving it higher.  And due to the strong inverse correlation with the dollar, many important commodities fell.  This sent many short-term commodity futures traders running for the exits.

But the short-term commodities sell off isn’t all bad.  In fact, it’s creating a buying opportunity for savvy investors…

Unless US Dollar policy changes dramatically, the dollar’s recent bounce will be short lived.  And a policy change won’t happen any time soon.  Fed Chairman, Ben Bernanke, recently said interest rates will remain exceptionally low for an “extended period”.

That means the dollar will likely return to its downtrend.  When it does, most commodities will resume their march higher.

And remember…

The underlying supply/demand fundamentals of many important commodities haven’t changed.  As world economies stabilize, and in some cases grow rapidly, commodity demand continues to flourish.

Take palladium for example…

The fundamentals for this industrial metal didn’t change one bit last week.  Yet the price of palladium fell $100 an ounce.  This is a perfect example of the short-term sell-off giving us an excellent buying opportunity.

We’ve invested in palladium once before with excellent results…

We hitched a ride on the back of palladium in early 2010.  Right when we saw demand for the metal building.  We pulled in a sweet 21% profit in just a few short months.

We’re looking for similar results this time around!

If you’re not familiar with this important metal, here’s a quick refresher…

Palladium is used heavily in the automobile industry.  The metal’s unique properties make it ideal for reducing emissions on internal combustion engines.

You see, when harmful exhaust fumes pass through a palladium coated catalytic converter, emissions are reduced… making the air we breathe cleaner.  Catalytic converters are a mandatory component of all internal combustion engines.

And with automobile demand surging in countries like China, palladium demand is growing swiftly.  Since over 50% of palladium supply goes to car manufacturers, the metal is closely linked with growth in the global auto industry.

According to JD Power and Associates, global auto demand is expected to grow by 6% in 2011.  What’s more, Chinese demand is expected to grow by 11% in 2011.  And the strong growth is expected to continue right through 2015.

But palladium supplies are tight…

Russia and South Africa are the world’s largest suppliers of palladium.  But in recent years, these countries have had a hard time keeping up with demand.  And those supply problems are growing as demand for the metal picks up.

This means the price of palladium should remain in a strong uptrend.  And the recent commodity sell-off gives us a perfect buying opportunity.

Here’s the ETF we’ll be using…


I’m sure many of you remember our investment in the ETFS Physical Palladium Shares (PALL) in 2010.  We’re using the same ETF to gain exposure to palladium this time around.  Remember, PALL holds physical palladium, not futures contracts like many ETFs.  One share of PALL entitles you to 0.1 ounces of palladium.  The price and movement of PALL is based on spot price of palladium.


Take a look at the chart…


PALL is currently trading just under $73.00.  The recent sell-off is providing a great buying opportunity.  Go ahead and add shares of PALL to your commodity ETF portfolio right now…


ETFS Physical Palladium Shares (PALL) is trading at $72.56.
Buy PALL up to $73.50 per share.
Our profit target is $85.00 or more.
Don’t forget your position sizing.

Commodity Review

Energy JJE $23.73 $24.88    -4.6%
Grains JJG $52.71 $55.91    -5.7%
Industrial Metals JJM $44.19 $48.35   -8.6%
Precious Metals JJP $89.35 $88.91     0.5%
Softs JJS $78.68 $88.24   -10.8%
Livestock COW $29.41 $31.86    -7.7%
All Commodities DJP $49.32 $52.10    -5.3%


Energy commodities experienced a quick sell-off last week.  Both oil and natural gas are down from where they were just a short week ago.

But don’t expect the weakness in energy to last long…

The world’s insatiable demand for energy is only growing.  This fact has long-term investors buying energy commodities at current levels.  Case in point, investment bank JP Morgan says oil will surpass its recent $114 high by the end of 2011.

I couldn’t agree more.  Keep holding your positions in JJE and UNL for further upside…


The grains complex was not immune to the recent commodity sell off.  Soybean, corn, and wheat all pulled back to their long-term uptrend lines.

But the fundamentals for grains remain strongly bullish…

As of May 1st, the USDA said 13% of US corn crops were planted.  That’s way downfrom where corn plantings should be this time of year… around 40%.  The wet spring weather is hampering efforts to get seed in the ground.  I see grains remaining in a solid uptrend.

If you don’t have a position in grains yet, add JJG to your portfolio up to $54.00…


Copper is pulling back in recent trading…

The highly important construction metal is trading at the very important $4.00 level. But again, we see the current pullback as a buying opportunity in copper.

The International Copper Study Group (ICSG) says global copper demand is exceeding production.  And, the supply shortage is expected to continue through 2012.  These factors point to higher copper prices in the future.

If you don’t have a position in copper yet, add (JJC) to your portfolio up to $55.00…


Gold and silver prices have been the talk of the town lately…

Unless you’ve been on a deserted island for the past few months, you’ve no doubt heard about them.  Gold pushed over $1,550 an ounce, while silver rose to nearly $50.00 an ounce… a 30 year high.

But then the CME got involved…

By raising initial margin requirements 84% in two weeks, the CME sent silver investors packing.  The CME’s artificially induced selling pressure popped a short-term bubble in silver prices.

But I don’t think the run in precious metals is over.  Global economic fundamentals are still pointing to higher prices.  Keep holding your positions in IAU and PGM for higher prices…


Most soft commodities continue to show weakness…

After a huge run higher earlier in the year, cotton is falling precipitously.  US cotton farmers are planting 14.5% more cotton than they did last year.

Sugar is also enduring a sharp pullback in price.  After a solid run-up in late 2010, investors are selling sugar.  World production is expected to outpace consumption by a large margin in 2011- 2012.

The only soft commodity holding onto its uptrend is coffee…


After running to multi-year highs just a few weeks ago, cattle prices are seeing a hefty sell off.  The USDA recently said cattle on feed inventories rose 5% over last year.  Rising supplies are a clear signal for falling prices, and that’s exactly what’s happening.

Portfolio Changes

  • This month we’re adding Palladium (PALL) 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.