Base-Jumping Metals ETNs

By Brad Zigler

Real-time Monetary Inflation (per annum): 9.0%

Take a look at that subhead again. Monetary inflation's at 9%. Nine percent. We haven't seen that kind of number since January, when inflation was spiraling downward toward a March low of 6.9%.

(Remember, we're talking about wholesale monetary inflation here, not variances in the cost of goods as metered by the Consumer Price Index; an explanation of how our monetary inflation figure is computed can be found in "A New Low - And An Explanation - For Monetary Inflation").

U.S. Monetary Inflation

Recently, a lot of investors have been betting on the erosion in the greenback's purchasing power indirectly through base metals - that is, by wagering on the increase in the demand and the cost of aluminum, copper and zinc.

No better manifestation of those gambles can be found than the PowerShares DB Base Metals Double Long Exchange-Traded Note (NYSE: BDD), which represents a double-levered take on the performance the Deutsche Bank Liquid Commodity Index (DBLCI) - Optimum Yield Industrial Metals.

As the dollar sold off Thursday, BDD was the day's best-performing commodity exchange-traded product [ETP] winner. BDD picked up 79 cents, or 10.2%, to $8.51. Granted, some of the bang in BDD's move was wrought by its double exposure to the underlying DBLCI subset.

The index is based upon a combination of returns from the base metals index together with the interest earned on the Treasury bills used to collateralize the purchase of a metals futures portfolio.

The unlevered version of the base metals index is reflected in the pricing of the sibling DB Base Metals Long Exchange-Traded Note (NYSE: BDG). Thursday, BDG closed up 6.8%, still a winner against most ETPs.

Friday's U.S. jobs report took some of the steam out of the base metals ETNs. BDD opened 41 cents (4.8%) lower when the U.S. Labor Department reported better-than-expected job losses. You'd think that the appearance of another "green shoot" on the economic landscape would be bullish for industrial commodities. And it ought to be, but the tug-and-pull of the dollar on commodity prices can trump all else nowadays. Metals are priced for world trade in dollars, and the buck just got a kick in its upside pants this morning after being beat up this week.

If you want to play the base metals game, keep that in mind. Though there's a positive relationship between monetary inflation and metals prices, it ain't perfect.

Quite a bit less than perfect, if you think about it.

Base Metals Vs. Monetary Inflation In 2009

Comments

[TheSnail:]

is there where I get the green shooters? I'm thirsty.

Jun 07 07:51 PM

[dsrtwriter:]

No, actually the problem is that too many "Americans" (we don't ask for green cards anymore) are thinking like social Democrats, and too many Republican politicians are only thinking of their job and pension, not the principles of Ronald Reagan, who is now regarded as quaintly old fashioned.

No, actually what we need is for more Americans to become true Conservatives, to seal our border, to make people work for their benefits, to emphasize that nobody has a "right" to the labor of others, whether through taxation or mandatory laws.

Instead, we are in a Barack world, where GM bondholders have no rights, but the UAW's cadre of lazy, overpaid high school graduate workers with obscene benefit packages now "own" over thirty percent of a company which is going to fail anyway, since Barack will allow the Chinese to "partner" and end up building all the cars in China, without the constrains of environmental or workplace regulation.

Jun 08 01:21 PM