Commodity ETF Alert November 2010 Portfolio Update

November 24, 2010

Commodities markets are swinging from one extreme to another in November.  Early on, the market was extremely bullish.  Then around mid month, we had a bearish reversal.

Here’s the deal…

Commodities began the month with a bang… gold hit $1,400 per ounce, silver hit $30 per ounce, and oil was just under $90 a barrel.

What was driving those flashy numbers?

In a nutshell, an improving global economy.  China’s growth was red hot and the U.S. is showing signs of breaking out of the doldrums.

Mid-term elections went down the way the bulls expected.  The Fed pushed through QE2. And good economic news had investors feeling optimistic.

But things can change in a hurry…

Out of nowhere, China’s Consumer Price Index rocketed to a 25-month high of 4.4%.  The specter of inflation couldn’t be ignored.  As a result, China raised interest rates. 

In short, higher interest rates mean slower growth.  And slower growth means less demand for commodities.

And that’s not all…

The Eurozone had its own scare with Ireland needing a bailout from the EU and the IMF. Meanwhile in the U.S., QE2 is dealing with challenges in the political arena.

All in all, these macro events sparked a big commodity selloff.  Some were hit harder than others.  Overbought commodities such as cotton and sugar saw the biggest declines.  But just about every commodity across the board pulled back to some extent.

In my opinion, we’re just seeing some short-term noise.  The fundamentals favor higher commodity prices in the long-run. 

Global demand continues to grow.  The world’s population is getting bigger… and richer. Commodities will be needed in larger and larger amounts to meet the need of developing and developed countries.

Best of all, the commodities in our portfolio have amazing upside as the economy improves.

Now on to the position updates…

Position Updates

. . . . iPath Dow Jones–UBS Livestock ETN (COW) – Buy up to $30.00

Our most recent trade got off to a fast start.  COW hit a high of $29.69 for a very quick 3% gain.  That’s a nice way to start things off.

What’s most impressive to me is COW maintained… and even gained some… when the rest of the commodities markets were selling off.  China’s inflation fears didn’t spook livestock!

The fact is, the fundamentals for both cattle and hogs remain very strong.  We’re seeing short supply and high demand coming into the holiday season.  That’s a great recipe for higher prices.

If you haven’t done so, grab your shares of COW up to $30.00.

. . . . United States Heating Oil Fund (UHN) – Buy up to $28.50

Like many other commodities, heating oil is being driven by macro news.  In early November, UHN breached the $29.00 level – a 7% gain – before pulling back.

When crude oil makes a significant move, like it did earlier this month, heating oil tends to follow suit.  Remember, heating oil is a byproduct of crude oil.  They’re affected by many of the same fundamentals.

As I mentioned above, crude oil hit nearly $90 a barrel.  The rise in oil prices was directly related to the expectation of global economic improvement.

Then crude oil – and heating oil – hit a snag.

The macro environment changed… It took crude oil prices down and UHN along with it.

However, I believe this is only temporary.

The coldest part of winter has yet to arrive.  Regardless of what crude oil does, heating oil will get a bump when temperatures drop.

I think UHN is positioned for another rally soon.  If you haven’t grabbed your UHN shares yet, go ahead and buy them up to $28.50.

. . . . iPath DJ-UBS Grains ETN (JJG) – HOLD

Grain prices are being heavily influenced by macroeconomic conditions.  Our JJG shares hit a high of $53.00 a share in early November.  That’s a stellar 22% gain.

Since then, prices have pulled back a bit.  Fortunately, the future of grains looks bright.

Strong fundamentals drove JJG’s nice climb through early November.  Supply shortages across the world are pushing grain prices higher.

And this temporary pullback won’t change anything.

JJG’s drop is due mostly to inflation fears in China.  However, the facts of the supply shortage haven’t changed.  Once investors get over the initial shock of higher rates in China, grain prices should continue their climb.

Bottom line… I expect to see even higher prices in JJG.  Let’s hold on to our shares.

. . . . iPath DJ-UBS Platinum ETN (PGM) – HOLD

Platinum is holding strong.  Our shares in PGM hit a high of $42.80… good for a 17% gain. Not bad!

Precious metals pulled back on the China inflation news.  But they’ve already started their climb back up.  Global uncertainty is giving metal bulls a reason to grab metals like gold, silver, and of course, platinum.

Bottom line, precious metals are one of the safest places to be right now… and that includes platinum.

Let’s hold on to our PGM shares for bigger gains.

. . . . iPath S&P GSCI Crude Oil Total Return ETN (OIL) – HOLD

Oil prices saw a big run up to almost $90 a barrel… levels we haven’t seen since 2008. Prices were being driven by a positive economic outlook in the U.S. and in China.

But as we all know, things can change in a hurry.

China’s inflation scare put a damper on oil prices.  As of this writing, crude oil prices retreated to under $82 a barrel.

Keep in mind, oil prices are still higher than just a few short months ago.  So, this selloff is pretty mild.  More importantly, the improving economy will push oil prices higher… it’s only a matter of time.

I see no reason to worry about oil right now, or anytime in the near future.

Let’s continue holding our position in OIL.

. . . . iPath DJ-UBS Cocoa ETN (NIB) – Buy up to $45.50

Cocoa is continuing to buck the trend… it’s holding tight to its recent highs.  NIB has been in the $39 to $42 range for nearly two months now.  And I expect cocoa to continue to be range bound in the short-term.

The Ivory Coast is in the midst of major elections.  Uncertainty in the world’s largest cocoa producing country is keeping prices in a tight range.  Once the elections are resolved, we could see cocoa make a more significant move.

And the fundamentals look good for higher prices.

With other agricultural products getting all the attention –and the higher prices– cocoa is in danger of being left by the wayside.  If farmers decide to shift their crops from cocoa, it could result in a significant supply shortage.  That means a big time rally in NIB.

In the meantime, holiday demand could push cocoa prices higher in the short-term.  Either way, I’m glad we’re already holding NIB in our portfolio.

If you haven’t done so, grab shares of NIB while it’s still in our buy range.  We could be on the verge of a big increase.

Action To Take

• None at this time.

Category: Commodity Trading