Commodity ETF Alert November 2011 Issue

| November 7, 2011 | 0 Comments



It’s easily the top-performing commodity over the past five years.  Since 2007, gold’s risen from a mere $640 an ounce to just over $1,900 earlier this year.

That’s an astonishing 197% gain… 

The only commodity coming close to gold’s incredible performance is silver.  But that metal’s amazing run happened in less than half the time.

With that said, gold’s run has been longer and steadier…

So much so, that all major asset classes- equities, fixed income, and real estate have all underperformed gold since 2007.

In fact, stocks as a whole have actually lost money since 2007.  The S&P 500 is currently 12% below early 2007 levels.

And while fixed income investments (bonds) are performing better than stocks, this relatively hot asset class is still drastically underperforming gold.

And what about real estate?

I don’t think we even need to go there…

If you compare gold against the competition, it’s fair to say the yellow metal’s one of the best performing investments around.  A $10,000 investment in gold five years ago would now be worth about $27,500.

A similar investment in a broad basket of stocks clearly wouldn’t have been so rewarding.

But now, a fair share of prominent investors are saying gold’s record breaking run is about to fall apart.  You don’t have to look far to find someone suggesting gold’s trading in a massive bubble.

One of their primary arguments is that Exchange Traded Funds (ETFs) are allowing for a massive over-investment in gold.  They say private investors’ easy access to physically backed gold ETFs is the only thing pushing demand (and prices) to record highs.

They go on to say…

Once global economic fears subside and interest rates start rising, gold will come crashing back down to earth.  The same people that caused gold to rush from $640 to $1,900, will make it plummet right back down.

According to the bears, when the “speculators” realize the gig’s up, they’ll rush out of their easily traded ETFs and cause a gold market crash.  Some analysts go as far as to say gold will crash down to $700 an ounce by the end of 2011.

What a remarkably stupid theory…

No doubt about it, gold bears have plenty of compelling ‘ideas’ to support their argument.  But they’re missing some very important facts.

Facts leaving little doubt gold will rise in 2012… and beyond.

What are these essential details?

First of all, we know Federal Reserve Chairman Ben Bernanke is going to keep interest rates “exceptionally low” through mid-2013.  And with short-term interest rates at 0%, it means real interest rates are negative.

What does that mean?

It means investors in short-term US Treasuries are actually losing money when inflation is taken into account.  And they’re going to continue receiving a negative real interest rate for at least another year and a half.

History tells us gold performs very well in times of negative real interest rates.  So as long as rates stay low, which the Fed is planning on, gold’s going to have the wind at its back.

And the US isn’t the only one with an easy monetary policy…

The central banks of Europe, Turkey, Indonesia, and Brazil have all recently cut rates. Rates in these countries aren’t as low as in the US, but easing policy will help move gold higher, not lower.

Gold’s bullish fundamentals get stronger the deeper you dig…

Emerging market central banks are increasing their gold reserves in order to diversify away from the US Dollar.  According to International Monetary Fund data, Mexico has increased gold holdings by 83 tons in 2011 alone.

And they’re not the only ones…

Russia’s added 59 tons while Thailand’s nabbed 52 tons in extra gold reserves so far this year.

And let’s not forget about China…

They have the largest foreign exchange balance of any country in the world- $2.8 trillion.  But compared to other countries, they’re massively underinvested in gold. According to the World Gold Council, the country only holds 1.7% of their for-ex reserves in gold.

Compare that to US reserve holdings of 73% gold and Germany’s 70% and you can see why China needs to play a bit of catch up.

If China were to bring their gold holdings up to a mere 5% of their total foreign reserves, it would represent a massive buying spree.  You don’t have to be an expert to figure out what that would do to gold prices.

Bottom line…

Even though gold’s taken a breather this summer, the long term bull-run is far from over.  Low interest rates as far as the eye can see and massive central bank buying suggests 2012 will be another exciting year for gold!


As you know, we’re still sitting on a profitable position in iShares Gold Trust (IAU). Keep holding this ETF for higher prices.

Why are we going long gold again?

It still has the strongest fundamentals of any commodity out there.  And since we sold half our position in IAU earlier this year, now’s a great time to get fully exposed to gold again.

But this time we’re attacking gold from a different angle.  The Sprott Physical Gold Trust (PHYS) is an ETF holding physical gold in vaults in Canada.  PHYS closely tracks the price performance of gold.  What’s more, you also have the ability to redeem your shares of PHYS for physical gold if you choose.


Take a look at the chart…


PHYS is currently trading at $15.63.  Shares are already moving higher after this summer’s big drop in gold.  Go ahead and grab your shares of PHYS right now.  I don’t expect it to happen, but if gold drops in coming weeks, PHYS may drop to the $14.50 area.  If it does, use it as a buying opportunity!


Sprott Physical Gold Trust (PHYS) is trading at $15.63.
Buy PHYS up to $16.10 per share.
Our profit target is $25.00 or more.
Don’t forget your position sizing.

Commodity Review

Energy JJE $20.66 $18.77    +10.1%
Grains JJG $45.82 $43.79   +4.6%
Industrial Metals JJM $36.65 $36.21   +1.2%
Precious Metals JJP $99.39 $92.46   +7.5%
Softs JJS $73.77 $75.07   -1.7%
Livestock COW $30.92 $30.70   +0.7%
All Commodities DJP $45.12 $43.33   +4.1%


Remember when we bought into our oil position (USL) in August?

At the time, investors feared Europe’s financial system was pulling apart at the seams. Oil nose-dived from $100 to $76 in a matter of days.  It was no doubt a scary time to go long the oil market.

But that’s exactly what we did.

And now here we are…

Oil’s once again trading at $96 a barrel with its sights set on $100.  And we’re sitting on a gain of 13% in USL.  Investor confidence in Europe’s debt fix has bulls returning to the oil market.

What do we do now?

Let’s keep holding USL for higher prices.  As long as Europe doesn’t go careening off the tracks, it’s highly likely oil will test $100 in the near future.  But keep in mind, its not going to be a smooth ride.  Don’t be surprised if oil retests the $90 area before making a run higher.


The past month’s been pretty boring as far as grains are concerned.  Corn’s slowly moving higher from the $6.50 a bushel area.  But soybeans and wheat are still holding near the bottom of their 52-week trading ranges.

These markets may start moving again soon…

The November USDA crop production report hits the wires tomorrow.  Information held in this report will steer grain trading into December.


Copper is slowly recovering some of the summer’s big losses.  Progress on the European debt crisis is giving investors a reason to jump back into the red metal.

Remember, copper is highly sensitive to economic news…

When there’s bullish economic news, copper acts very much like the stock market- it rallies.  But when the news is troubling, bears take the stage.

Other industrial metals- aluminum, nickel, and lead- are essentially unchanged from last month.


See this month’s trade alert for more details on gold.

As far as silver goes, the shiny metal is slowly working its way higher from last month’s sell off.  Hopefully some of you jumped on the opportunity to pick up more silver at the $30 area.  As of today, silver’s trading at just under $35 an ounce.

SLV has amazing long-term potential.  Let’s keep holding it for higher prices.


After getting off to a fantastic start, our coffee position was knocked down a notch last week.  Now JO’s trading just above our original buy-up-to-price of $58.

What happened?

An update on 2012’s Brazilian coffee crop pushed the bulls out of the market for the time being.  According the Brazilian coffee exporters council, a strong harvest is set to hit the market next year.

Now a growing consensus of coffee traders is thinking there could be a market surplus in 2012.  If so, coffee prices would likely fall below $2 a pound in coming months.  And a move below $2 would mean JO would likely fall below $50.

Given this new information, I think it’s prudent to be careful with our JO holdings.  We don’t want to ride it down to $50 a share or lower.

So here’s what we’ll do…

If JO trades below $54 per share in the next couple of weeks, go ahead and close this trade.  On the other hand, JO may rally in coming weeks due to our original investment thesis in the trade alert.  Bottom line- keep a close eye on this trade.

Cocoa, cotton, and sugar are all trading near multi-month lows.  Sugar’s the only other soft commodity looking like it has a chance of running higher over the next few months.


There’s not much new to report in the cattle market.  Our investment thesis is still intact and COW is still trading above our entry point.  Since we applied this trade in September, we’ve seen a peak gain of 7%.  Let’s be patient and allow this trade to work as we head into 2012.

Portfolio Changes

  • This month we’re adding gold (PHYS) 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.