Commodity ETF Alert October 2012 Issue
The International Monetary Fund (IMF) is making waves…
A recent economic growth report out of the highly respected organization suggests global growth is in trouble.
In fact, the IMF suggests that without further action to stimulate global economies, growth would weaken in the world’s biggest economies… Europe, the US, and China.
Not surprisingly, Ben Bernanke and his associates at the US Federal Reserve are getting in front of this worrisome issue.
As you may know, they’ve already taken action to strengthen the US economy through a third round of quantitative easing (QE3).
According to Fed Chairman Bernanke, the $40 billion a month program will continue for as long as it takes unemployment rates to improve “substantially”.
No doubt about it, QE3 is a major development…
And as long as the US Congress can tackle the looming ‘Fiscal Cliff’, this new round of stimulus should lead the US economy to new heights in 2013.
As unemployment improves, people spend more money, creating more demand for goods and services, which creates even more jobs… you get the picture.
But there’s a side effect to all this monetary stimulus…
In order to buy $40 billion a month in mortgage-backed securities as they’re planning, the Fed has to have the money to do it with.
Where do they get all this money?
It’s a complicated process, but in a nutshell, the Fed prints money out of thin air.
I know the term “out of thin air” is thrown around by investors and economists alike. But it’s true, the massive quantities of dollars needed to implement QE3 are literally brought into existence at the Fed’s will.
And here’s where it gets really interesting. All this new money increases the US monetary base. Take a look at this chart from the St. Louis Federal Reserve Bank and you’ll see exactly what I mean…
Since the financial crisis took hold in 2008, the Fed’s introduced massive amounts of new dollars into the US economy. As you can clearly see, the first two rounds of QE had an undeniable effect on the amount of money entering the system. And staying true to form, the third round will do the same thing.
So, why’s that such a big deal?
Each dollar that’s brought into existence devalues the ones that are already in the system. In other words, dollars lose purchasing power as new money is created. It’s the primary reason behind inflation. As the dollar loses value, it takes more of them to buy everyday items.
And that’s not all. The things that go into making everyday items become more expensive as well…
…you know, things like commodities.
Experienced investors realize there’s a negative correlation between commodities and the US Dollar. In other words, when the dollar goes up, commodities generally fall… and vice-versa.
Take a look…
As you can see from this long-term weekly chart, when the dollar falls (blue line), commodities generally rise (red line). And when the dollar rises, commodities have a tendency to take it on the chin.
Of course, one of a commodity investor’s major challenges is figuring out the future direction of the dollar.
But now that we’re on the cusp of another massive easing campaign by the Fed, the odds are high that the greenback will lose value in coming months. And that means now’s the perfect time to make sure our commodity ETF portfolio is positioned for profits.
Now, as many long-time subscribers know, we added important commodities such as gold and platinum in the months preceding the announcement of QE3. Of course, now we’re sitting on some sizeable profits in these positions (more on that in a minute).
But there is a commodity sector we haven’t added yet. And it’s one that will likely benefit from not only a falling US Dollar, but the fact that QE3 may actually work as planned.
What is this under-loved batch of commodities?
…industrial metals.
I know it isn’t exactly a ‘sexy’ idea like gold or silver. But the fact is, things like aluminum, zinc, and copper are all important building blocks of industry. And if the Fed’s stimulus plan actually works as planned, demand for these essential metals will increase.
So, not only do we have the high likelihood of a falling dollar supporting this trade, we also have the possibility of a strengthening US economy.
Those are two important fundamentals that are hard to bet against…
ABOUT INDUSTRIAL METALS
We’re exploring a new way to invest in the industrial metals sector this month. The PowerShares DB Multi-Sector Commodity Trust Metals Fund (DBB) tracks the price of three important base metals… copper, zinc, and aluminum. These three metals are equally weighted in DBB (approximately 33% each), so we won’t see one metal have a greater influence on our returns than another… which is just what we want.
TECHNICALLY SPEAKING
As you can see, DBB has already rallied in recent trading thanks to the bullish developments I just mentioned. But remember, QE3 is just getting started. And the fact is, we’ll likely see this easing campaign last longer than many expect. That means the move in industrial metals is just getting started.
Now let me be clear, we may see DBB pull back to the $18-$19 area before continuing higher. If it does, use it as a buying opportunity.
WHAT TO DO NOW:
PowerShares DB Multi-Sector Commodity Trust Metals Fund (DBB) is trading at $19.48.
Buy DBB up to $20.00 per share.
Our profit target is $25.00 or more.
| COMMODITY | TICKER | CURRENT VALUE | LAST MONTH | CHANGE |
| Energy | JJE | $18.15 | $17.51 | +3.7% |
| Grains | JJG | $58.22 | $62.42 | -6.7% |
| Industrial Metals | JJM | $35.59 | $34.96 | +1.8% |
| Precious Metals | JJP | $96.66 | $94.30 | +2.5% |
| Softs | JJS | $58.22 | $57.35 | +1.5% |
| Livestock | COW | $27.86 | $27.57 | +1.1% |
| All Commodities | DJP | $43.77 | $43.99 | -0.5% |
ENERGY COMMODITIES
In case you haven’t noticed, the crude market is experiencing some massive volatility. In fact, West Texas Intermediate Crude (WTIC) just had two back-to-back trading days where the commodity moved nearly $4… in opposite directions!
What’s going on?
Bulls and bears are locked in a vicious battle over oil’s future direction. Bears say there’s too much crude on the market and prices need to come down. But bulls believe there are too many risks to global production for oil to trade under $90 a barrel.
Who’s right?
Time will tell. But let me tell you this. I’m glad we collected a 14% profit on half our position in the iPath S&P GSCI Crude Oil ETN (OIL) a couple weeks ago. Given the uncertainty over economic growth in major global economies, the odds of oil regaining the $100 a barrel mark in the near future are growing slimmer by the day.
Of course, we still have a couple bullish catalysts out there -namely Iran and QE3- but crude’s likely going to trade in the mid-$80 range for the foreseeable future.
We’re currently sitting on a 5% profit on our remaining OIL position. Let’s keep it at a hold, just in case the unthinkable happens in the Middle East.
Natural gas is a different story…
Bulls are finally taking this commodity on a stampede to higher prices. In fact, Henry Hub natural gas is up 20% in the past three weeks! The recent rally has our United States 12-Month Natural Gas (UNL) trade turning in a tidy 13% profit.
But don’t you dare sell this one yet…
Winter’s setting in. And it’s very likely that weekly Energy Information Administration(EIA) inventory reports are about to reveal a sudden drop in US natural gas supply. And you know what that means… we could see a natural gas rally like no other.
Let’s keep holding UNL for higher prices ahead!
GRAIN COMMODITIES
Grains have eased from their recent flirt with all-time highs. In fact, both corn and soybeans have seen hefty sell-offs over the past month.
What’s going on?
Recent USDA crop reports suggest the damage done by this year’s drought might not be as bad as previously thought. Of course, corn dropped like a stone once the news hit. With the essential grain trading near $8.00 a bushel, investors had no choice but to sell.
We’ll get more word on the status of this year’s crop later this week as multiple USDA reports hit the wires.
Bottom line…
Grains remain a very touchy trade at current levels. Unexpected news can move these markets fast and furious… in either direction. Let’s steer clear for now.
INDUSTRIAL METALS
Here’s some more good news for you…
Since we’re adding DBB to the portfolio this month, let’s take profits on our iPath Copper ETN (JJC) position. As I said earlier, DBB is partially made up of copper so there’s no need to have two open positions in this industrial metal.
As of today, JJC is giving us an 11% profit. Not bad for a few months work!
Congratulations on a nice trade!
PRECIOUS METALS
September was a great month for gold…
The yellow metal rose from just under $1,700 an ounce at the start of the month to nearly $1,800 in the days following Bernanke’s QE3 announcement. The recent rally has our iShares Gold Trust (IAU) trade sitting on a nice 11% profit.
It was much of the same for silver. The shiny metal had a solid month as investors positioned their portfolios to capitalize on another massive round of monetary stimulus by the Fed.
But let’s not get too confident just yet…
Both gold and silver may see a bit of short-term selling as investors lock in gains from the recent rally. After all, both metals are overbought on a short-term basis. And that means the odds of a correction are high.
But whatever you do, don’t sell your positions in IAU or the iShares Silver Trust(SLV). Let’s hold both ETFs through the looming correction and be ready for the next leg higher.
Platinum’s a different story…
The recent rally in this precious/industrial metal has been nothing short of amazing. And as you know, we caught every dime of this metal’s surge with our position in the iPath DJ- UBS Platinum ETN (PGM)!
We’re currently sitting on a sweet 22% profit in PGM. And since we’re within a whisker of our original $40.00 profit target, let’s go ahead and take this trade to the bank! There’s no sense in risking our hard-earned gains for a few additional percentage points of profit.
Go ahead and sell PGM at current prices. Congratulations on a fantastic trade!
As far as palladium goes, let’s stick to our guns…
The metal’s already pulled back significantly from its September rally highs of $700 an ounce. I suspect we’ll see a few more weeks of choppy price action before the metal regains its upward momentum.
Let’s keep holding the ETFS Physical Palladium Shares ETF (PALL) for higher prices…
SOFTS
Unfortunately, cocoa’s fallen back below the $2,500 technical support area. As I’ve said in previous reports, cocoa needs to stay above this important price area for our bullish thesis to stay intact. The fact that cocoa’s fallen below this critical level is a red flag for our trade in the iPath DJ-UBS Cocoa ETN (NIB).
So here’s what we’re going to do…
Let’s place a stop loss order under our NIB trade. Doing so will get us out of the trade if cocoa continues falling, but leave us open to further upside if the commodity rallies.
If NIB closes below $32.00 on a daily basis, go ahead and close this trade. We don’t want to risk riding this ETF back into the red if cocoa continues falling. On the other hand, if NIB rises in coming weeks, leave the trade open for further upside.
As far as the rest of the soft commodity complex goes, I don’t see any imminent trade opportunities.
LIVESTOCK
The livestock markets have been all over the map this year. However, the supply/demand fundamentals for cattle and hogs are once again growing more bullish now that winter’s approaching.
I’m keeping an eye on this commodity sector for a future trade.
- This month we’re adding industrial metals (DBB) to the portfolio.
Category: Commodity Trading
