For the larger part of this year, commodity exchange traded funds (ETFs) were soaring. Then recently, they had their wings clipped. Was the correction the beginning of the end, or a pause for breath for more?
In the recent correction, commodities fell an average of about 8%. We think that given the fundamentals and the fact that commodities remain above their long-term trend lines, a case can be made that the commodities rally isn’t cooling.
Three key things are driving commodities right now:
- There is increasing worldwide demand for them – from emerging to developed markets, people want, use and need commodities in ever greater numbers
- There’s uncertainty in global currencies, which makes commodities attractive because they maintain their value
- Investing in commodities is easier for investors these days with the evolution of ETFs
When you look at other commodities in more detail, the case for them holds up on a macro level.
Gold: Gold prices have shot up about 20% or more this year, thanks to safe-haven seeking, jewelry demand, investment demand and a small bit of industrial demand. If you feel like you missed the rally, consider Market Vectors Gold Miners (NYSEArca: GDX), which gives exposure to miners around the world. Miners are enjoying huge profit margins now; it costs around $300 to extract an ounce of gold from the ground. [The Benefits of Owning Commodity ETFs.]
Silver: Silver is often called the “poor man’s gold” because it’s so much cheaper, but it’s more versatile than gold in industry, jewelry and an investment. Silver is also viewed as a leveraged gold play: when gold prices are rising, silver moves faster (it falls harder when gold is falling, though). iShares Silver Trust (NYSEArca: SLV) this ETF tracks the spot price of silver
Platinum: Platinum recently surged to the highest price since July 2008; it’s currently around $1648 an ounce. Platinum is both popular in jewelry and industry, primarily used as a component in catalytic converters. South Africa, which has 75% of the world’s platinum reserves, is expanding its extraction of the metal in order to keep in step with demand. ETFS Physical Platinum (NYSEArca: PPLT) is the only direct way to play this metal.
Copper: There’s a strike among Chilean miners that has gone on for nearly three weeks. Chile is the world’s largest copper producer, so interruptions could be felt in the markets. China is a major contributor to this market and the country is on track to triple copper consumption to 20 million tons by 2020 (by then it will account for 49% of the world’s copper sales). There’s no physical copper ETF yet, but exposure to miners can by had via First Trust ISE Global Copper (NASDAQ: CU).
Aluminum: Again, China plays a big role here as the world’s largest producer and consumer of the metal. Prices have shot up in recent weeks because of power curbs. Tongues are wagging over the prospect of a physically-backed aluminum ETF, but until the ETF arrives, there is the iPath DJ-UBS Aluminum (NYSEArca: JJU) to play it.
The commodity rally won’t last forever, and hiccups are bound to occur. You can stay on top of them with a simple strategy like trend following, which has you in for potential long-term uptrends while offering downside protection, as well. Read more about how the strategy works here.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.