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GoldSeek Web

Commodity Prices and Exchange Traded Funds

-- Posted Wednesday, 20 February 2008 | Digg This ArticleDigg It! | Source:

Countless arguments have been put forward to explain the disconnect between commodity prices and commodity stocks. Regardless of the reasons, it is now clear that investors need to own a mixture of both. Underlying Commodities through exchange traded funds and commodity stocks.


Take Gold for example, the Gold mining equities have not been this low relative to bullion since 2004 and 2005.


Chart 1 - Gold Equities (GDX) lagging Gold Bullion (GLD)


Or how about Silver?

Chart 2 - CDE chronic underperformer versus Silver metal

Mid-tier Silver miner Coeur D’Alene (which admittedly has had company specific problems) is back to its 2003 low versus the metal. Not much leverage to the price of Silver here!


You may be forgiven for thinking that this peculiarity is only in the precious metals arena. You’d be wrong. The same relative underperformance is apparent in Crude versus the Oil Stocks, Copper versus the Copper producers and on and on, covering the entire commodity sector.


Regardless of whether the underperformance is due to investors shying away from equities or recently burnt out real estate investors have a penchant for tangible things. The point is that there will be rotations in this commodity bull market. As such we have advocated investors keep a portion of their portfolio in the underlying commodity as well as the equities.


In our latest subscriber newsletter we profiled the many different ways one could hold the underlying commodity and their respective drawbacks (physical, futures, CTA, structured products etc.). We came to the ultimate conclusion that ETFs were probably the best vehicles.


The 3 ETFs which have yet to break out to new highs but may do so if the commodities complex continues higher are:


PowerShares DB Base Metals – code DBB (Aluminum 34%; Copper 37%; Zinc 28%)


iPath DJ AIG Livestock TR Sub-Idx - code (lean Hogs, Live Cattle)




Natural Gas – code UNG (pictured below)


Chart 3 - Natural Gas ETF looking bullish


In addition to the rotation discussed above, the commodity ETFs are less volatile than their equity cousins.


Whilst such rotations will probably continue over this long bull market, the fact that chart 1 and chart 2 are oversold augers well for a new phase of rotation back into the mining equities.


As discussed in Commodity Charts help with Stock Trading, it pays to have a mix of both!


More commentary and stock picks follow for subscribers…




Greg Silberman CA(SA), CFA

I am an investor and newsletter writer specializing in Junior Mining and Energy Stocks and small caps listed in the US, Canada and Australia.

Please visit my website for a free trial to my newsletter.



This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis. 

-- Posted Wednesday, 20 February 2008 | Digg This Article | Source:


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