Commodity ETF Alert October 2011 Portfolio Update

October 25, 2011

Is The ‘Summer Of Discontent’ Finally Coming To An End?

The markets are looking a little brighter in recent days…

European politicians are agonizingly close to putting their sovereign debt issue to bed- at least for a while.  That progress has investors piling back into markets across the board.

Commodities are reacting very nicely to the news.

According to the iPath Dow Jones-UBS Commodity Index Total Return (DJP) the commodity complex as a whole is up 7% from its recent lows.  Considering how dire the outlook was three weeks ago, that’s a great sign.

And now there’s another reason to be bullish on commodities…

Caterpillar (CAT) reported earnings on Monday morning.  Strong quarterly results from this global equipment powerhouse suggest economic growth isn’t slowing as quickly as economists thought.

That’s bullish for commodities.

Now let me be clear, the problems in Europe will likely resurface at some point.

But we can’t ignore the market’s positive reaction to recent developments.  If the European debt fix continues unfolding in a positive manner, commodities may continue rallying into year-end.

Let’s see what’s happening with our open positions…

Position Updates

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

Gold is still hanging around the mid $1,600 an ounce range.  Sure, that’s a far cry from the recent highs of $1,900- but don’t get discouraged.

We’re entering a seasonally bullish time for the yellow metal.  Gold has a strong track record of bottoming in October and running higher through year-end.

In fact, according to the Commodity Trader’s Almanac, buying gold in November and selling in early January has been a profitable trade for 28 out of the past 35 years… a win rate of 80%.

Regardless of what happens to gold over the next two months, one thing’s for sure- gold’s long-term fundamentals are still strongly bullish. 

In fact, Citigroup just raised their average 2012 gold price forecast to $1,950.  That’s well above their previous 2012 estimate of $1,650.

Now, I’m not trying to suggest Citigroup is an expert on precious metals.  But it’s interesting that Citigroup (along with a slew of other investment banks) is raising their gold price target.

You see, most banks have badly missed the boat on gold over the past two years. They’ve routinely forecasted low average prices only to see gold surge to record levels. Now it seems they’re coming to their senses.

Remember, we’re still sitting on a hefty 22% gain in half our original investment in IAU. Keep holding for more upside.

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

Not much new to report as far as natural gas is concerned.

For yet another month, inventories remain stubbornly high and prices remain incredibly low.  But like I’ve said many times in the past, this long-term investment should reap considerable rewards… at some point.

How?

The US trucking industry is progressing towards a natural gas future.  It will take some time, but once truckers switch to natural gas engines, we’ll see a big dent in inventories.

What’s more, a fair share of oil and gas companies are slowing their natural gas drilling efforts to focus on oil.  This growing trend will eventually help bring natural gas supplies back down to earth.

But for now, let’s move UNL to a hold.  As of today, natural gas prices don’t look like they’ll rally into year-end.  Once I see more bullish conditions, we’ll move UNL back to a buy.

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

Like gold, silver’s had a tough couple of months…

Since running up to $44 an ounce in August, the illustrious metal’s been a bit of a disappointment.  And that has many investors wondering if the bull-run for silver is officially over.

Not so fast…

Not only are long-term bullish fundamentals still in place for silver, they’re getting stronger.  Recent inflation readings in India suggest the country may soon see a heavy dose of inflation.

If that holds true, Indian silver demand will likely surge.  Let’s keep holding our position in SLV for a rebound.  If you haven’t already, consider buying SLV up to $33.

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

Our trade in coffee is starting off nicely…

In fact, we’ve already seen a peak gain of nearly 10%… not bad for such a short amount of time.  But remember, we’re looking for much higher coffee prices in coming months.  Our profit target on JO is $75- so be patient.

As fall progresses into winter here in the US, weather conditions in prime coffee growing regions will affect the outcome of this trade.  Any sign of freezing or excessive rain in Brazil and Columbia will likely send coffee prices soaring.

I’m moving JO to a ‘hold’ as it’s moved beyond our buy-up-to-price.

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

How quickly things change…

Just one month ago, investors were panicking as oil dropped to $76 a barrel.  Fears of slowing economic growth and the pandemonium in Europe made the oil markets quite jittery.

But now the storm clouds are clearing…

Oil is up over 22% from its recent lows- a startling move considering how uncertain this market was not long ago.

Why such a big jump?

Crude oil future contracts at the NYMEX are moving into backwardation.  Now don’t let the fancy word confuse you.  It simply means the market is worried about near-term supply.

Whenever front month crude contracts trade higher than longer-term contracts, the market is considered in backwardation… and it’s very bullish for oil.

Our USL position is currently sitting at an 8% gain with oil now popping over $92 a barrel. As long as global economic factors don’t deteriorate any further, it’s very likely oil will test the $95-$100 area by year-end.

Keep holding USL so we can capture more gains…

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

Higher than expected October feedlots cattle placements has cattle futures pulling back a bit.

Why are feedlot numbers rising?

The record drought that’s sizzling states like Texas and New Mexico is raising a new batch of worries.  And it’s forcing southwestern US ranchers to continue culling their herds.

What’s the worry?

Hay prices are surging.  With winter approaching, ranchers need hay to feed their cattle. But this summer’s epic drought not only destroyed forage, it also devastated hay crops.

So instead of paying out the nose to buy hay for the winter, ranchers are simple selling their cattle.  It’s a tough decision to make, but a necessary one for cash-strapped ranchers.

This selling pressure is increasing feedlot numbers in the short term.  However, the long-term effects of this are strongly bullish for cattle prices.

We’re currently sitting on a 5% gain in COW.  Keep holding for further upside in coming months.

Category: Commodity Trading