Commodities Conundrum: Is the Run Overdone?

Includes: DBA, DVN, SLW, UXG
by: Stock Traders Daily

A variety of factors have been testing investor confidence in recent weeks. New home sales are near their lowest level in 50 years. Unemployment is hovering close to 9%. The citizens of Japan and Libya have faced tragic levels of adversity. Yet some segments of the market have continued to tick along at a nice clip.


Precious metals have been one of the primary beneficiaries of the market unrest. The price of gold is now trading at historic levels near $1,440 per ounce. This movement has been huge for gold miners. Toronto-based U.S. Gold Corporation (NYSE:UXG) posted an 11.1% gain on Wednesday.

Silver has had an even more remarkable run when compared to gold over the course of the past year. The end of this run does not appear to be anywhere in sight. The price of silver set a new 31-year high on Wednesday as it closed above $37 per ounce. The silver streaming company Silver Wheaton (NYSE:SLW) saw its stock price jump 5.6% on the day.

The array of factors that have served as a drag on equity markets the past few weeks have made precious metals an ideal safe haven. Traders must now grapple with figuring out whether or not this run is overdone. Could there be even more room to the upside for precious metals, or has this trade become too crowded?

Favorable Fundamentals

Natural gas is another commodity that has garnered a lot of attention in recent weeks in light of elevated crude prices and concerns about nuclear power. On Wednesday, natural gas futures rose to their highest level in seven weeks as worries surfaced that cold temperatures in the U.S. this spring could raise demand for heating oil.

One of the largest natural gas producers in the U.S., Devon Energy (NYSE:DVN), has seen its stock price spike 18.4% so far this year. Bloomberg has reported that Devon’s CEO, Larry Nichols, has said that natural gas production can be ramped up in just a matter of months due to the notion that the fuel can be extracted cheaply from shale deposits.

One other class of commodities that could also be near its peak is agricultural commodities. Goldman Sachs has noted that increasing global corn supplies taken together with other factors could bring corn prices lower by 2012. The PowerShares DB Agriculture Fund (NYSEARCA:DBA) is up 3.9% year-to-date.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.