Commodity ETF Alert November 2011 Portfolio Update

November 22, 2011

Europe Casts A Long Shadow Over Commodity Markets…

European debt market jitters are forcing investors to the sidelines once again.  I’m sure you remember how Greece’s debt problems sent commodity markets reeling earlier this year.

Well, now those fears are building again…

But this time it’s fears over Spain and Italy- whose economies are much larger than tiny Greece.  Government bond yields in both debt-laden countries have been soaring in recent weeks.

Why is that bad news for commodities?

Yields above certain levels make it unaffordable for a government to raise money in the bond market.  Those unaffordable levels were reached recently when Italy’s bond yields surged over 7%.

Spain’s yields followed lock step by shooting above 6.5% over the past few days.

These dangerous developments are creating a sense of uncertainty and fear amongst commodity investors.  And they’re reacting by taking risk off the table- an understandable response in such a highly uncertain scenario.

So, what should you do? 

We can’t ignore the Europe induced downside risks to our current holdings.  If things get dramatically worse, which is a growing possibility, we’ll need to be careful with our open positions.

Obviously, we want to avoid riding commodities down if Europe takes another turn for the worse.

But there’s a silver lining to all this uncertainty…

Excellent commodity investment opportunities are unfolding as this crisis plays out. Essential commodities with bullish long-term supply/demand metrics are being sold by investors- simply to reduce risk.

Once clarity presents itself in Europe, undervalued commodities will present a fantastic buying opportunity.

Let’s take a look at each of the commodity ETFs sitting in our portfolio…

Position Updates

. . . . iShares Gold Trust (IAU) – Hold 

Gold hit a speed bump last week…

A surging US Dollar has the yellow metal trading down since we last spoke.  As you may know, gold trades inversely to the dollar.  In other words, when the dollar rises substantially, gold usually starts going in the opposite direction.

And that’s exactly what’s happened over the past few days.

The dollar’s gaining traction due to growing European worries.  You see, the dollar is still the ultimate ‘safety’ trade in times of extreme economic uncertainty.  When things start getting really ugly, investors move into the world’s reserve currency.

But the upward trend in the dollar won’t last forever…

Once Europe’s problems move to the wayside, the dollar will likely resume its long downward spiral.  At that point, gold will be free to continue its upward climb.

Despite all the recent volatility, I still see gold trading above $2,000 an ounce in 2012.

Remember, we’re in IAU from $13.20.  And that has us sitting on a gain of 25% at current levels.  Let’s keep holding IAU for more upside.  On the other side of this crisis, gold should be one of the first commodities to start moving higher.

. . . . Sprott Physical Gold Trust (PHYS) – Buy up to $15.63

Our most recent addition to the portfolio is presenting a great buying opportunity at these levels.  Remember, our trade in PHYS follows the exact same thesis as IAU.  We’re looking for gold to go higher in the long run.

If you haven’t already, buy PHYS up to $15.63.

. . . . United States 12 Month Natural Gas (UNL) – Hold

Natural gas prices are looking downright ugly these days.  However, there’s a silver lining to these ultra-low prices.

What is it?

The front month natural gas futures contract is currently trading around $3.40 mmBtu… not far from the 52-week low of $3.30.  It means we may see a technical bounce in coming weeks when the lows of $3.30 are tested.

Nevertheless, let’s keep our position in UNL at a hold.  Gas prices are low, but until there’s a significant drawdown in inventories, any bounce is unlikely to stick.

. . . . iShares Silver Trust (SLV) – Buy up to $33.00

Like gold, silver had a tough week…

Nothing’s changed as far as silver’s bullish fundamentals are concerned, but the metal clearly followed gold lower the last few days.  It’s pretty clear… until the uncertainty in Europe is cleared up, silver’s going to remain volatile.

However, the long-term supply demand fundamentals remain strongly bullish.  If you haven’t already, buy SLV up to $33.

. . . . iPath Dow Jones-UBS Coffee (JO) – Hold

Despite the downdraft in most soft commodities last week, coffee is holding up nicely.

Columbian weather is putting coffee bears back on the defensive.  Heavy rain in the South American country is interrupting the flowering of coffee trees.  If the rain continues, (which meteorologists think it will), Columbia’s 2012 coffee crop will come in light.

In fact, the Colombian coffee growers federation just reported the 2012 Arabica coffee crop would likely come in around 8 million bags… close to a 35-year low.  That news could be enough to kick coffee prices back to the upside in coming weeks.

Let’s keep holding JO, but remember to keep a close eye on the $54 area.  This is the line in the sand we spoke about in the last trade update.

If JO trades below $54 per share in coming weeks, close this trade.  Otherwise, keep holding JO for further upside.  We may still see this trade turn into a nice winner by year-end.

. . . United States 12 Month Oil (USL) – Hold

Oil is without a doubt the strongest performing commodity over the past two months.

Scary Middle Eastern news headlines, combined with an already tight global crude market, helped push oil over $102 a barrel last week.  Oil’s fallen back a bit this week, but it’s still hovering around $98.

As you know, we got into USL a couple of months ago when oil was at $80 a barrel.  That has us sitting on a sweet 16% gain in USL.

Unless Europe turns into a complete train wreck in coming months, I think oil is destined to move higher.  We have plenty of breathing room in this trade, so let’s stay long USL as 2011 draws to a close.

. . . . iPath Dow Jones–UBS Livestock Subindex (COW) – Hold

Cattle prices are holding up nicely amidst all the uncertainty overseas.  In fact, the technical picture in cattle looks great.  Live cattle prices remain in a strong uptrend.  Like I’ve said in past reports, the long-term fundamentals are very strong for cattle.

Keep holding COW for higher prices.

Category: Commodity Trading