Copper started the week with a new year high and brokers are uncertain as to the cause, reports Andrea Hotter for The Wall Street Journal. Market fundamentals aren’t supporting any strong price gains at the moment. Copper did receive a boost yesterday after the factory orders report. (Where’s copper going?)

• iPath DJ AIG Copper TR Sub-Idx ETN (NYSEArca: JJC): up 107.8% year-to-date

The U.S. Commodity Futures Trading Commission Commitments of Traders report revealed that speculative long positions have hit a high last seen in the beginning of 2006, which means downside risk is accumulating, and the current commodities market is still bullish. Experts and analysts are divided as to how prices will pan out.

• iShares S&P GSCI Commodity-Indexed Trust (NYSEArca: GSG): up 10% year-to-date

China is the largest holder of U.S. debt, with around $1 trillion, and experts are urging China to diversify its currency holdings unless the country enjoys watching its dollar holdings depreciate in value, remarks Andrew Snyder for Today’s Finance News. Another option for China is to exchange some dollars for commodity holdings as a better way to hold value – also, better for commodities investors gazing at those price upticks.

• PowerShares DB U.S. Dollar Index Bearish (NYSEArca: UDN): up 7.4% year-to-date

Natural gas inventories are almost topped off  with a little more than 3.7 trillion cubic feet – the total country storage space is 3.9 trillion cubic feet. Snyder believes the natural gas market has ridden the commodities bubble and a correction may soon take place as the spot market corrects for the excess inventory. (How to avoid a bubble).

• United States Natural Gas (NYSEArca: UNG): down 57% year-to-date

Keep in mind that these are just predictions. Watch the markets for what really happens, and act accordingly. When investing in commodities, it’s wise to have an exit strategy that involves a stop-loss points that you can execute when the time comes. (How to protect yourself with a trend-following plan).

For more information on commodities, visit our commodity category.

Max Chen contributed to this article.

New regulatory actions in the futures-backed commodities market could pose problems for a variety of popular oil ETFs, including the largest one – United States Oil (NYSEArca: USO), writes Don Dion for TheStreet. Other futures-backed oil ETFs that may be affected by position limits include iPath S&P GSCI Crude Oil Ttl Ret Idx ETN (NYSEArca: OIL) and United States 12 Month Oil (NYSEArca: USL). (What does the future hold?).

In the beginning of the year, the CFTC made inquiries about the impact of USO’s impact on the oil market after prices rushed to a record $147.27 in July 2008 before plummeting to near $30 months later. The providers of USO responded by expanding the period in which it rolled its contracts and reducing its position in the underlying benchmark. USO escaped further notice as investor interest turned from oil to other investments, most notably  United States Natural Gas (NYSEArca: UNG).

Recent restructuring of PowerShares DB Commodity Index Tracking (NYSEArca: DBC) portends possible regulatory action that could result in size restrictions on all futures-based oil ETFs. DBC’s managers restructured its oil weightings and also included oil futures contracts traded in London to avoid CFTC restrictions. The managers of UNG have been turning to the over-the-counter swaps markets to get some exposure. We could see more of these types of things as regulations come forward. (What are swaps?)

Assets in long-only commodity ETFs don’t appear to have been dented by the increased regulatory oversight of futures-based funds. At the end of October, assets in the funds stood at nearly $65 billion – a 12% increase from August.

Dion suggests that novice traders steer clear of oil funds until regulatory revisions are set and those who purchase shares should keep the size of the investment in check. Another option to consider for investors leery of futures-based funds are ETFs that hold shares of oil companies. (How to invest in oil using ETFs).

When investing in oil or commodity ETFs, it is important to have a strategy in place. For a more detailed explanation of using a trend following strategy, take a look at The ETF Trend Following Playbook.

For more information on oil, visit our oil category.

Max Chen contributed to this article.

As the commodity market sets up to appeal to investors, there are certain areas of the market to focus in on.

According to Lee Lowell for Investment U, these are three areas poised to move:

Gold. Gold is one area that has not disappointed. Gold has regained the elusive $1,000 per ounce and has motored to all-time highs of more than $1,060 per ounce. The U.S. dollar remains weak, giving weight to the argument that gold still has some shine left yet. Some analysts are even calling for the $2,000 per ounce mark. (What you can do if there’s a bubble).

• SPDR Gold Shares (NYSEArca: GLD): up 16.4% year-to-date

Silver. Silver has rallied back to the $18 per ounce area – a new high for the year, but still $4 per ounce below its all-time high of $22 from February 2008. That being said, it has handily outperformed gold this year. If gold continues to move, silver should follow. Because the silver market is smaller than gold’s, it can be volatile, so watch the trend lines and pay attention to the 200-day moving average. (Can silver benefit from inflationary pressures?)

• iShares Silver Trust (NYSEArca: SLV): up 41.6% year-to-date

The colder winter months lie ahead, making the case for natural gas stronger. Natural gas has finally moved off the lows it has logged since the highs of 2008. After bottoming in price just a few weeks ago, natural gas has rallied back up to levels last seen in early August. Bulls and bears are duking it out, though: the large amount of reserves in natural gas are re-enforcing the bears case for a pullback in this commodity. Bulls think winter will eat up those reserves. (A tale of two natural gas ETFs).

• United States Natural Gas (NYSEArca: UNG): down 55.3% year-to-date

For more stories about commodities, visit our commodity ETF category.

For disclosure, Tom Lydon’s clients own shares of GLD.

As economies around the globe start to recover, the demand for commodities, such as crude oil, gasoline, steel and timber will follow.  Additionally, as emerging nations develop and populations continue to grow, the demand for agricultural-based commodities, such as sugar and cotton, will increase as well.  The problem that lies ahead for investors is accessing some of these commodities, in particular those that hold hard assets. (Why commodity ETFs are a solution).

For more stories on commodities, visit our commodity ETF category.

It turns out, that getting exposure to hard assets with low correlation to other asset classes isn’t as easy as it sounds. Although a host of fairly new exchange-traded products based on commodities are available, the only ETFs backed by physical commodities are in precious metals, reports David Bogoslow of BusinessWeek. This, perhaps could be a reason that many investors turn to commodities ETFs that utilize futures contracts, such as United States Natural Gas Fund (NYSEArca: UNG). (Regulators hurt commodity ETFs?). Be sure to look under the hood when investing in commodity ETFs to know how it’s constructed.

Investors do have the choice to gain exposure to hard asset producers, as well, through such funds as the RVE Hard Assets Producers ETF (NYSEArca: HAP), which is up 35.9% year-to-date. (There are 4 different commodity ETF types – do you know them?)

Kevin Grewal contributed to this article.

Although there are two ETFs that track natural gas, they are going in two directions. The important difference in performance between these two funds can be credited to structure and the ongoing drama unfolding in the futures markets, as well as the regulations that could be coming down on these markets any day now, explains Don Dion for TheStreet. (What it means for investors).

The two funds in question are:

• United States Natural gas (NYSEArca: UNG): down 49.8% year-to-date; UNG recently updated some changes to its strategy, which you can read about here.



• First Trust ISE-Revere Natural Gas (NYSEArca: FCG): up 59.3% year-to-date; FCG tracks the performance of companies involved in the natural gas industry

As a result of forthcoming Commodity Futures Trading Commission (CFTC) regulations,  exchange traded products may continue to see restructurings, closings and share redemptions. (Read all about what’s happened up to this point here).

For more stories about commodity ETFs, visit our commodity ETF category.

Natural gas is becoming a darling of the energy market and it has much going for it: it’s easy to use, easy to transport and burns cleaner. The greatest plus is recent reports suggesting that gas shale fields in the United States contain more natural gas than originally thought. In fact, those resources are enough to end our foreign oil dependence, reports Jared Killeen for Heating Oil. (Read about UNG’s strategy changes here).

Some analysts are skeptical that there is enough yields from wells to be high enough or last long enough to make the gas shales very profitable, even if prices go up.

Meanwhile, Venezuela has confirmed the discovery of an estimated 8 trillion cubic feet of gas recently announced by Spain’s Repsol YPF SA (REP). Dan Molinski for The Wall Street Journal reports that President Hugo Chavez is seeking to set up “Venezuela to be one of the tops in the planet in terms of proven natural gas reserves.” (Read about the differences in commodity ETFs).

For more stories about natural gas, visit our natural gas category.

• United States Natural Gas (NYSEArca: UNG): down 51.6% year-to-date

• First Trust ISE-Revere Natural Gas (NYSEArca: FCG): up 58.7% year-to-date

The deal calls for a supply of nearly 2.5 trillion cubic feet of gas per year via two potential routes originating from Siberia. The deal focuses on Central Asian countries and Russia as suppliers of natural gas, reports Edward Wong for The Wall Street Journal.

Gazprom, Russia’s state-run gas supplier and China National Petroleum Corp., China’s largest oil and gas supplier, have not yet worked out pricing details. (Read about the four things going for Russia).

A pipeline will run along the bottom of the Baltic Sea, driving a political wedge between Eastern and Western Europe. Central and Eastern European leaders fear the pipeline could usher in another round of domination by Russia through the use of gas, reports Andrew E. Kramer for The Wall Street Journal.

Russian gas has already been routed through Eastern Europe to Western Europe services. The new pipeline will give Russia a direct supply line to the west, enabling it to play “pipeline politics” with its eastern neighbors.

Read on for more stories about Russia, China or natural gas.

• Market Vectors Russia (NYSEArca: RSX): up 137.7% year-to-date; Gazprom 7.1%; RSX is also 43% energy

• iShares MSCI BRIC (NYSEArca: BKF): up 83.8%year-to-date; Gazprom is 4.1%

• First Trust ISE Revere Natural Gas (NYSEArca: FCG): up 52% year-to-date

• PowerShares Golden Dragon Halter USX China (NYSEArca: PGJ): up 63.2% year-to-date; China National Petroleum is 4.7%

A case in point: while both WisdomTree Dreyfus Chinese Yuan Fund (NYSEArca: CYB) and United States Natural Gas (NYSEArca: UNG) use forward contracts, they differ in how they work.

Don Dion of the Street.com has an excellent piece that explains the differences between the two ETFs and how they handle futures contracts. He states that a premium found in CYB is caused by factors that differ from those that led to a premium in UNG.

This summer, UNG paid a premium between the contracts it was selling and those that it was buying. Each time UNG sold a contract, it sent the price of that contract lower and raised the price of the contract it was buying.

In CYB,  the premium it pays is because traders believe the Chinese currency will appreciate. (Read our special report on currencies). Already this year, CYB is up 1.8% this year – more than the 1% the currency itself has gained.

Commodity investors can alleviate contango by buying a 2010 futures contract, but currency traders can’t get around the premium for the yuan. (What’s contango?)

Other factors in this issue include:

• Speculative demand. If traders believe a currency will gain, they’ll bid up forward contracts.
• Storage issues. Higher futures prices are based on the costs of storage; currencies don’t need storage, so this issue is moot for them.
  

For more stories on currency ETFs, visit out currency ETF category.

For full disclosure, Tom Lydon’s clients own shares of UNG.

Kevin Grewal contributed to this article.

United States Natural Gas (NYSEArca: UNG) will undergo some changes to its investment strategy to better manage the funds size and track the price of natural gas, reports Jon C. Ogg for 24/7 Wall St.

A recent filing with the Securities and Exchange Commission (SEC) revealed that UNG invested “primarily in futures contracts for natural gas, crude oil, heating oil, gasoline, and other petroleum-based fuels.”

While these will still be the primary vehicles, other ones the fund’s managers are considering include cash-settled options on futures contracts, forward contracts for natural gas, cleared swap contracts and over-the-counter transactions based on the price of natural gas, crude oil, other petroleum-based fuels, futures contracts and indexes. (Read about how swaps work in an ETF).

The fund’s presence in the natural gas futures market became the key target of the Commodity Futures Trading Commission’s (CFTC) focus on limiting the size of futures-based ETFs over concerns that such funds were causing volatility in the markets. (Read here for the full rundown). As a result, the providers of such funds have had to find creative ways to stay within these limits while still ensuring that their funds are operating optimally.

Some of the changes, however, may create higher risks that ETF investors need to be aware of – namely, the risk of tracking error.

For more information on natural gas, visit our natural gas category.

• United States Natural Gas (NYSEArca: UNG): down 51.2% year-to-date

Max Chen contributed to this article.

According to David Nadiq for IndexUniverse, investors who are more inclined to invest in commodity ETFs have a choice in what type of ETF they use to get exposure:

Equities. Equity-based commodity ETFs are funds that hold mining companies and other companies involved in the production of various commodities. Be aware that the performance of these companies are not always correlated to their underlying commodity. In the case of coal, steel and other commodities, sometimes equity-based commodity ETFs are the only way to gain exposure to these assets in an ETF. Long-term capital gains rate on equity-based ETFs is 15%, but be sure to consult your tax professional for further guidance.

• SPDR S&P Metals & Mining (NYSEArca: XME): up 73.4% year-to-date

Physical. Physical ETFs hold the actual physical commodity. Precious metals ETF holders would own an interest in a fractional amount of the physical commodity. The small investor may consider physical ETFs over holding the physical commodity because of costs associated with storage of the commodity. Potential investors should also note that profits in bullion-based ETFs are taxed at 28%, but consult your tax professional for advice.

• iShares Silver Trust (NYSEArca: SLV): up 56.1% year-to-date

Futures-based. Most commodities are traded on futures exchanges. A future is a promise to buy, or sell, a commodity for a set price at a set date in the near future. A majority of the future contracts traded on the exchange floor are settled or swapped for cash before the expiration date.

Futures also add a time component to the price: when tomorrow’s cost is higher than today’s, it’s called contango; the inverse called backwardation. Investors should note that some ETFs have blind front-month roll strategies, but most ETFs now buy futures months in advance. None of these ETFs claim to deliver the spot price of the underlying commodity.

Futures-based ETFs are usually reported on K-1 tax forms. The profits are taxed at 60% long-term and 40% short-term capital gains rate. Read more about how ETFs are taxed here, and always consult your tax professional for advice.

• iShares S&P GSCI Commodity-Indexed Trust (NYSEArca: GSG): up 8.1% for the year

Swaps-based. Swaps recently entered the ETF conversation when the popular United States Natural Gas (NYSEArca: UNG) turned to them in order to gain exposure. Generally, ETFs that invest in swaps receive the benchmark performance through the swap. The use of swaps give investors exposure to areas of the market that can be difficult to target. Read more about the benefits of swaps here. When the Commodity Futures Trading Commission (CFTC) announces regulatory changes, swaps could become a part of even more futures-based ETFs.

For more information on commodities, visit our commodity category.

Max Chen contributed to this article.