Don Dion's Weekly ETF Blog Wrap

Here is some of what Don Dion blogged about on RealMoney this past week.

Gold Seems Like a Winner, No Matter What Comes

Posted 11/23/2009 12:28 p.m. EST

Some investment managers and economists predict that many commodities will decline in price next year due to strong supply, but such a move may be thwarted by inflation. In either case, gold may be the best commodity to hold.

A Bloomberg story out today quotes Bill Gross and Nouriel Roubini, plus a variety of industry and investment reports, to paint a picture of commodities supply that exceeds demand. Gross and Roubini expect economic weakness going forward, such that expected demand does not materialize and oversupply causes prices to decline.

One sector that recently gained is industrial metals. They have had a strong run since Oct. 2, with PowerShares DB Base Metals (DBB Quote) up 18%, iPath Copper ETN (JJC Quote) up 17%, iPath Industrial Metals ETN (JJM Quote) up 13% and iPath Aluminum (JJU Quote) up 12%. (iPath Nickel ETN (JJN Quote) headed in the other direction, down 3%. Exposure to nickel is what caused JJM to underperform DBB.)

By comparison, iShares Comex Gold (IAU Quote) gained 15% and the S&P 500 index gained 6% over the same period. The recent run in metals appears to be inspired by inflation, because economic data have not improved significantly and the move is very similar to the gain in gold.

Investors who want to play this rally and expect stronger economic growth should stick with a diversified ETF such as DBB. Higher demand plus inflation will cause the industrial metals to outperform.

While DBB should do well in an inflationary scenario even with weak demand, a large drop in demand may still cause prices to decline. A better option for a strictly inflationary play is IAU, because gold has very little industrial demand. Gold also offers less risk on the downside because a lack of inflation will mean a weaker-than-expected economy, possibly accompanied by more financial crises.

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