3 Commodity ETFs with High Probability of Near-Term Success

Here are 3 commodity ETFs with a reasonable probability of gaining significant ground:

1. United States Natural Gas (UNG). Bespoke recently reported that United States Natural Gas (UNG) has seen a 77% increase in trading activity over the last 50 trading days. Marc Courtenay identified that the price of oil is trading at 19x that of natural gas at $3.7 a British Thermal Unit whereas history pegs the ratio at 10x. In other words, oil could pull back to $60 per barrel, and natural gas would need to jump 60% to reach the historical average.

I spoke about natural gas in a recent column, "Shouldn't the Natural Gas Commodity ETF Catch Up To The Natural Gas Company ETF?" In essence, the explorers/producers of natural gas in the First Trust Rever Nat Gas Fund (FCG) had amassed nearly 25% YTD, whereas the commodity being tracked by United States Natural Gas Fund (UNG) had lost -37%. This disparity adds more fuel to the nat gas fire.

However, it's been extremely volatile for traders and longer-term believers alike. In the last 10 days alone, United States Natural Gas (UNG) has traded in a range between 13.56 and 16.07... more than 15%. And here on 6/11/09, as I type, it's trading 6% higher at the half-way mark.

2. E-TRACS UBS Long Platinum ETN (PTM). Like the vast majority of commodities that went bust in the 2008 sell-off, platinum swan-dived -65% from its record heights. Not only had the demand for "stuff" imploded, but the demand for platinum had an additional hurdle; that is, with more than half of its world demand coming from the auto industry, the downtrend was exacerbated.

Nevertheless, the global industrial cycle has picked up dramatically, pushing E-TRACS UBS Long Platinum ETN (PTM) up 70% off its 52-week lows. While it would require a 70% gain from here to recapture its glory days, many would simply be satisfied to see steady appreciation in a quasi-precious metal/base metal investment.

E-TRACS UBS Long Platinum ETN (PTM) is, by all accounts, in a technical uptrend above its 200-day moving average.

3. Powershares DB Agriculture (DBA). Agriculture, while providing consistent 2009 gains, has underperformed metal mania. For the most part, this is due to extreme attention being paid to re-emerging market infrastructure growth.

What's not accounted for, however, is re-emerging global food demand due to increasing standards of living as well as population growth. Moreover, U.S. consumption of food is roughly 15% of the Consumer Price Index (CPI). The percentages in China and India are 33% and 46% respectively.

DBA is comprised of futures contracts on some of the most widely traded agricultural commodities including corn, wheat, soybeans and sugar. Considering alternative energy needs for biofuels, the ever-present possibility for adverse weather conditions and corn usage currently exceeding production, one might look to further gains in agriculture.

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[bikelane:]

Agreed, Marc. Also, I think it's a little misleading to suggest that oil and NG have no connection. Aside from simple fuel switching where that is a viable option, we also should consider that some oil production operations become viable above a certain price, and many of those options can be huge drivers of NG demand. Finally, with all the reports I've been reading of NG rigs idled, and of small and mid-tier NG companies being hurt by taking big losses over the past six months, I don't see a lot of spare capacity to meet that increased demand, even with the new technical production plays, which typically take lots of time and large investments. Personally, I'm getting in now rather than later.

Jun 12 01:51 PM

[RiskReturnO...:]

DBA is best from technical perspective as well as seasonal patterns supporting another move up by July ... target is low-mid 30's for the intermediate term investors ... watch dollar and US hurricane forecasts for triggers for next move ... volume above 3mm shares / day helps support momentum upwards.

Jun 12 01:53 PM

[Marco Hickey:]

Check out GSG. I have been long some call option spreads since late April and it has paid off very nicely. I have already sold to cover what I have into it, and now I am just waiting for the next pop to take profits.

Jun 12 02:02 PM

[Poor Texan:]

On Jun 12 01:26 PM bobbobwhite wrote:

We have lots of cheap NG now and can easily make cars that burn it, and we do not have to depend on a a car chock full of batteries that might not work ever practically for the masses. Why not use NG now?
What is the problem?

Bob,
The problem is infrastructure. Some large companies (e.g. Frito-Lay) are running NG powered vehicles but they have a place to refuel on the premises. If I drive around in a NG powered car, I have no place to refuel. Want to open a NG filling station?

Jun 12 06:30 PM

[john the ba...:]

Clean Energy Fuels Corp. (CLNE)

Jun 12 07:33 PM

[Stephen Yu:]

My experience has been that a good time to buy a commodity is when the market price is below production cost, such as buying gold under $300 back in 2001, or buying oil at $35 a few months ago. Right now, it costs some producers more than the current price of $4 per mmBTU to produce natural gas. So even though the US may be the Saudi Arabia of NG, producers will stop pumping if they can't make money doing it. So it doesn't matter how much there is. Although I don't know when natural gas will bottom and at what price, I believe that it is hard to lose money buying in now if you set your horizon a little further than the next few months.

Jun 12 11:59 PM

[chleoku:]

Good insights on the etf

As Jim Rogers put it, we are stepping into serious inflation and commodity is the future:

www.wealthalchemist.co.../

this is definitely the future

Jun 13 06:08 AM

[jacflash:]

This is not a good time to be buying UNG if you are hoping for a significant short-term pop, for all of the very good reasons discussed above.

This is, however, a good time to be accumulating a position in natural gas for longer-term portfolios, as current price levels are simply not sustainable over the next 2-3 years and a significant rise is inevitable.

With so many stocks hitting fully-valued levels, there aren't too many easy opportunities left. One could do a lot worse than to put some of those recent profits into UNG as a longer-term play.

Jun 13 07:27 AM

[dirtyharry:]

Regarding UNG - Watch for the underlying natural gas price to first fall into the low $3 range. It's $3.86 right now and was as low as $3.25 in late April. If UNG drops to perhaps $3.10, that's probably a good entry based on current high supplies. The other factor to consider at the moment is we are likely at the beginning of a technical dollar rally. This will most likely push ALL commodity prices lower in the short run - perhaps over the next 1 to 3 months. In the long run, all commodities should see higher prices when the dollar finally breaks.

Finally, while I agree with others that you cannot simply look at the historical price relationship between natural gas and oil as your guiding light, it should not be totally ignored either. If the price disparity becomes increasingly "excessive" then market forces will find a way to consume more natural gas as an energy resource.

Jun 13 09:37 AM

[Henry Buttal:]

Gary,

Thanks for the analysis of PTM and DBA. I think platinum is in a long term trend up, and, as you pointed out, DBA targets a commodity set that can be found on every countries table.

As for natural gas; well, I think the other posts well reflect my opinion on short term to intermediate pricing of the commodity, and the risks associated with UNG

Jun 13 09:37 AM

[beaux:]

The fundamentals are well represented here. But consider this: from April 1989 to March 2009 EIA data run through a regression analysis reveals a correlation coefficient of .8775. That is a correlation that is not so easy to dismiss out of hand. Is everything that different now? (Leading and lagging of of the data by six months reduced the R-squared to .77) My view: as soon as traders begin looking forward to fall/winter the nat gas bid will grow. The base builds in the interim.

Jun 13 10:07 AM

[The-Stock-M...:]

The demand for Platinum is mainly from auto-industry, in the catalytic convertors. With the economy still down, jobs still being lost, the demand for cars and hence platinum is likely not going to come back anytime soon. PTM is probably just being driven up on "rising tide lifts all boats". Also, PTM seems to be a thinly traded ETN with just 103K avg volume. That also increases the risk, when folks start dumping it.

Jun 13 03:00 PM

[Peter Cooper:]

Why not go for oil, gold and silver ETFs? These seem a far more solid option that gas and platinum - Goldman has just given a strong pointer to the oil price direction, see:
arabianmoney.net/2009/.../

Jun 14 12:50 AM

[santacruzcarz:]

Kudos to insightful comments, and to the author for picking DBA.
As for UNG, I agree with dirtyharry that we are likely to experience red screens this summer, and an equally possible rally higher before then, so I am practicing patience on my "long term" buys.
Building a watchlist. Long term investor logic could be applied to many out of favor sectors, using ample statistics to establish credibilitly. Assumptions, and worse yet conclusions, drawn from only a few facts are just a part , one side of a story. This is what this rally is based on, call it anticipation, forward thinking, and so on.
Another side is the fundamentals, where ample evidence, and history, provide another side to each investment story. None of us know the future, but past and present conditions aside from data that merely confirms the rally, does not add up to rosy, not even close. Our currency has been going down, and treasuries falling
in value w/rising yields killing real estate and the US Gov.. Yes there is evidence to support the notion we'll see red screens, and inspire the next delayed recovery forecast. Since a falling market last summer led to a stronger US currency with a bubble in US treasuries, I am confident we'll have red screens again.

Jun 14 04:40 AM

[thetrystero:]

I see a lot of comments round these parts talking about the "fundamentals of commodities", usually with no backing data.

With a stock, one can look at the balance sheets etc. and calculate things like earnings yield, ROC etc. Can someone explain to me how one goes about valuing a commodity?
By that I don't mean looking at the financial statements of a particular ETF or of an oil explorer/producer etc. I mean really getting at the fundamentals of THE commodity as a whole with concrete NUMBERS. I have a feeling that things like EPS, ROIC etc. don't apply to commodities at all and one would have to develop a whole new vocabulary to describe their performance, perhaps a different set for each particular commodity.


On Jun 12 10:43 AM skrangeo wrote:

> I will be long on UNG at some point in the future (probably late
> fall is my best guess at this point), but the underlying fundamentals
> right now give ZERO support for natural gas trading at $4/mcf.

Jun 14 08:42 AM

[buyitcheap:]

As soon as the oil prices collapse b/c of all those full tankers floating in the ocean, we should see some regression to means. Gas looks like it could tick lower in the meantime, but a December/January contract could be a very nice trade.

Jun 14 11:08 AM

[Stephen Yu:]

In this week's Barron's Midyear Roundtable, Marc Faber thinks that natural gas is a good buy at this point. He thinks that it is extremely depressed.

Jun 15 12:09 AM

[one eye:]

Faber is not a "Doom and Gloomer".

He sure beat the hell out of everyone except Mobius (who is a Bull) and Hickey.

Jun 15 01:05 AM

[Mad Hedge F...:]

Not so fast. I heard a little tidbit yesterday that makes me feel like I just ate a bad fish taco. Frontline, the world’s largest tanker company, says that it has 100 million barrels in storage, the equivalent of five days of US consumption, the result of the spectacular contango situation that exists in the crude futures market. Traders have been buying front month crude, storing it, and reselling it one year out for non leveraged profits of up to 75%. With spot now at $72.12, and futures for December delivery selling at $75.56, that spread has narrowed to an annualized 9.53%. The last crude top was made by the filling of the Strategic Petroleum Reserve. Could this intermediate top be put in by the filling of the world’s excess tanker fleet? This makes me worried not just about crude, but all of my longs in commodities and their producing stocks, the S&P 500, the BRICK’s, and everything else that has enjoyed a torrid doubling since the beginning of the year. Could gold’s poor performance this week, which dropped from $990 to $935, be the canary in the coal mine? And by extension, is it time to take profits on my short Treasury positions by selling the TBT, which has also doubled? There are just too many charts hanging around their 200 day moving averages to dismiss this lightly. I hate to sound redundant, but selling in May is looking more clever by the minute. Cash is King.

Jun 15 10:26 AM

[Crude Oil T...:]

Commercials are starting to pour into crude shorts. Temporary top is upon us [$72?]. Natural gas is the play and Dirty Harry is right, after a move like we had on Monday there will be some profit taking. I will build a position back up, but won't quite wait for $3.10.


On Jun 14 12:50 AM Peter Cooper wrote:

> Why not go for oil, gold and silver ETFs? These seem a far more solid
> option that gas and platinum - Goldman has just given a strong pointer
> to the oil price direction, see:
> arabianmoney.net/2009/.../

Jun 16 02:19 AM