Commodity ETF Alert October 2009 Issue

| October 12, 2009 | 0 Comments


Quick, name a precious metal…

Odds are you said either Gold or Silver.  Those are by far the most popular precious metals.

Just last month we started buying Silver, and back in June we bought Gold.

The trades are working out perfectly.  We’re showing profits in both commodities.

Now it’s time to turn our attention to a third precious metal… Platinum.

Platinum has the nickname “Rich Man’s Gold”.  It got this nickname because of its price.  While Silver trades for less than $20 per oz, Platinum’s traded as high as $2,250 per oz!

Platinum’s one of the rarest metals in the world and it is only found in a few select locations… but more on that in a moment.

There are three big drivers propelling the price of platinum higher.

We want to buy this commodity now, and let this perfect storm of economic drivers propel Platinum prices through the roof… we’ll be laughing all the way to the bank!

So I know what you’re thinking…

Why Platinum?  Why now?

There are three events driving Platinum prices higher.  First, we have the rapidly approaching threat of inflation.  Second, we have seasonal fluctuations in precious metals.  And third, we’re going to see huge jumps in industrial demand for Platinum.

Let’s take a closer look…

If you read my recommendations on Gold or Silver, you know we are on the verge of huge inflation in the US.  To save the world from the credit crisis and certain financial depression, the US Federal Reserve flooded the markets with US Dollars.

The increased liquidity kept us from a depression.  However, the flood of dollars is setting us up for inflation down the road.  I’m not going to get into all the details here… just remember, with cheap and easy money flowing around the globe, prices of everyday items start to move higher.

We start paying more for a gallon of gas or a loaf of bread.  Everything gets more expensive.

Now, a little inflation is a good thing… but too much inflation is bad.  Excessive inflation can destroy economic growth.  How do we protect ourselves from inflation?

We need to invest in hard assets… assets that hold value and grow as inflation strikes.

In my opinion, commodities are a perfect place to be.

We’re already seeing the early signs of inflation.  Investors are rotating into hard assets like Gold and Silver.  Just look at their prices!  These investments are a traditional hedge for inflation.  I think their move higher is just getting started.

Platinum’s another way to hedge inflation… and inflation will drive its price higher.

But that’s not all.

The time of year is also a driver of precious metals, including Platinum.

We’re just a few short months away from the holidays.  As a matter of fact, I just watched the first Christmas advertisement of the year.  I know it seems early to be thinking about the holidays… but this is when the big money is made.

Precious metals follow a typical seasonal pattern.

The prices of these precious metals rise as we enter the gift giving season.  Jewelry is always a popular gift.  And it’s a big consumer of Gold, Silver, and Platinum.

Consumers are starting to feel more confident.  Unemployment rates are stabilizing. And, consumer spending is starting to grow again (in fits and starts).

Now, don’t get me wrong.  I’m not expecting a “knock-the-cover-off-the-ball” holiday shopping season.  I’m also not expecting a depression-like spending environment either.

Solid demand from the holiday season will certainly help propel Platinum prices higher.

The third and final driver of Platinum prices might surprise you.

I see increased industrial demand pushing the price higher.  You’re probably wondering which industry uses the most Platinum.  Would it surprise you to learn the number one consumer of Platinum is the automobile industry?!?

Platinum’s a major component used in catalytic converters.  Because of the metal’s unique chemical properties, it helps eliminate tailpipe emissions.

Few people realize the catalytic converter is one of the most expensive components on a modern automobile.

Yes, the auto industry is in the dumps, and car sales are at record lows.

The recession knocked the major automobile manufacturers to their knees.  Two of them even needed a government bailout.  While car sales are at all time lows, it’s not going to be like that forever.

As a matter of fact, in the next four years, 50 million new cars are expected to hit the road.  Most of them will require catalytic converters… and all of those will contain Platinum.

This increased automotive demand is certain to drive Platinum prices higher.

Platinum Production

While Gold and Silver have been used for centuries, man’s demand for Platinum is a recent phenomenon.

In the 17th century, large amounts of the metal were discovered in South America. Then Platinum’s unique characteristics started to shine.  The metal became very desirable.

Platinum’s resistance to corrosion and resistance to oxidization were discovered.  It was also discovered, Platinum is a very good conductor of heat and electricity.

Most of the world’s Platinum production comes from South Africa and Russia.  North America is a distant third in production.

More than 70% of global supply originates in South Africa, which means the commodity price is sensitive to the region’s economic and political stability.  Simple things like power outages, worker strikes, and even economic turmoil can easily disrupt supply.

According to some estimates, if you gathered all the Platinum in the world and dumped it into an Olympic size swimming pool, it would barely measure six inches deep.

That’s one of the reasons why Platinum trades at such high prices.

With a relatively thin and volatile production of platinum, supply is always at risk.  Also, the big driver of consumption – the auto industry – could rebound at any moment.  Simply tilting the supply/demand balance out of whack even a little and we could see Platinum prices jump big time.


The best way to invest in Platinum is with the iPath Dow Jones-UBS Platinum Subindex Total Return ETN (PGM), which is traded on the NYSE ARCA exchange.

Platinum prices can be volatile because of its use as both an industrial metal and a precious metal.  It means more investors, funds, and commercial users are involved in trading the commodity.


Platinum is in a very nice uptrend.  We have a number of technical indicators telling us this is only the start of the move.  PGM recently crossed above a resistance level at $32.  We also see the 50-day moving average is moving higher.  Another bullish sign is the 5-day moving average crossing above the 20-day.


The next resistance levels for PGM are at $37.50 and $40.  If the automotive industry starts to rebound, we could see the mid $40s in just a few months.


The iPath Dow Jones-UBS Platinum Subindex Total Return ETN (PGM) is trading at $32.38.
Buy PGM up to $34.50 per share.
Our Profit Target is $45.00.
Don’t forget your position sizing.

Commodity Review

Energy JJE $25.51 $23.28 9.6%
Grains JJG $37.40 $35.00 6.9%
Industrial Metals JJM $35.20 $34.59 1.8%
Precious Metals JJP $56.80 $53.17 6.8%
Softs JJS $44.55 $44.62 (0.2%)
Livestock COW $27.46 $27.13 1.2%
All Commodities DJP $39.22 $37.20 5.4%


The energy complex was a big winner this month with a jump of more than 9%. Natural Gas prices rebounded as Oil prices moved higher.  One driver was the threat of Iran and their nuclear capabilities.

The discovery of a secret uranium enrichment facility seems to be a non-issue for the markets right now.  It is something to watch closely.  Any change in posturing and we could see Oil prices jump.

Two months ago we put on a trade in Natural Gas.  We caught the trade on the upswing, and are seeing prices consolidate.  Consider building a position in GAZ below $17.

We’re starting to enter the winter season which will drive Natural Gas demand up. Prices are sure to follow.

Our other energy trade in Oil is holding strong.  Our price target on the OIL ETF is $27 so keep an eye out.  OPEC is holding production tight, and nobody seems to be cheating… yet.  Saudi Oil output has been stable at about eight million barrels a day.  This is having a stabilizing impact on the markets.


Grain prices jumped 6% this month.  Corn and most of the other grains have been in a steady decline for the last few months.  They’ve only turned higher recently on threats of frost.  Harvest levels are now larger than originally anticipated… this is hurting prices.


China recently announced plans to build a billion dollar Nickel smelting facility in Central Sulawesi Province.  Initial capacity is estimated at 30,000 tons.

Our Copper trade is consolidating.  Prices are moving sideways.  Hold tight, as good economic news comes to light, prices should be moving higher.  Growth from the US, Europe, or China will drive demand and prices higher.

The Aluminum market is now subject to manipulation by China (what’s new?).  The country set a ban on new smelters for three years.  They are concerned about the impact of oversupply on the market.  Aluminum prices are lagging other metals this year.

Several groups are launching plans for an Aluminum ETF… I can’t wait.

Iron Ore prices are still jumping on continued negotiations with Chinese steelmakers. Talks have now shifted to 2010 prices.  2009 prices were 33% lower than 2008.


Gold is now trading well above the $1,000 an oz. level.  The entire precious metals complex is up 6.8% this month.  Silver is jumping on an anticipated rebound in demand early next year.

Our Gold trade in IAU is showing a profit of more than 10%.  Our Silver trade from last month just moved above the buy-up-to level.  And our new trade for this month is Platinum.

We’re well positioned going into the holiday jewelry buying season, and well covered from the threat of a recession.  The weak dollar is helping push commodity prices higher and Precious Metals are getting a lot of attention.


The Softs complex moved slightly lower this month as a number of commodities bounced off recent highs.  Cocoa hit a 15-month high on news that global crop production is seeing huge losses.  The Ivory Coast’s harvest is estimated to be down by 14%.

Sugar is another commodity bouncing off the highs.  Sugar hit 28-year highs as poor weather in India and Brazil are destroying crops.  Because of the weather, India is now importing Sugar… traditionally they are an exporter.  I see prices moving even higher from here.

Orange Juice prices are up more than 30% from the lows touched back in the first quarter.  Apparently Brazilian dumping of cheap OJ has been dialed back.  That may have helped their Olympic bid!


Pigs may have hit bottom.  Hog prices jumped almost 15% just the other day… concerns over poor pork demand was replaced with supply concerns.  Farmers are reducing the number of sows bred this year.

Portfolio Changes

  • This month we’re adding Platinum (PMG) to the portfolio.  See above for all the details.
  • We’re above the buy-up-to price on Silver (SLV) – we’re moving it to a “Hold”.

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.