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TheStreet Open House

Commodity ETFs Ride the QE3 Tide

NEW YORK ( ETF Expert) -- Virtually all riskier assets gained significant ground in August. Yet, few have been as impressive as things like grains, oil and gold. Even the beaten-down industrial metals like copper and aluminum appear to have found their footing.

Is it because Europe is growing its way out of its recession? Hardly. Euro-zone leaders from Germany to the Netherlands still want a modicum of financial discipline out of Spain and Greece in exchange for their upcoming bailouts.

Is it because probable China stimulus will create more demand for a wide variety of commodities? Perhaps. Yet, Chinese leadership has been very deliberate in its determination on how best to enhance its already impressive expansion since the late 1980s. In essence, whatever measures the Chinese leadership take may be modest.

So if demand for "stuff" remains questionable and supply is adequate (not counting the drought-damaged agricultural sub-sector), why are across-the-board commodities rising with impressive momentum? Are commodities simply positioned well to benefit from the present-day "risk-neutral" environment ? Here are some popular commodity ETFs to play if you expect the Federal Reserve to deliver on a third round of quantitative easing, or QE3, with percentage growth for the past five days and the past month, respectively.

  • iShares Silver Trust (SLV), 5.2% for five days, 16.1% for month
  • PowerShares DB Precious Metals (DBP), 2.5%, 7.8%
  • SPDR Gold Shares (GLD), 1.9%, 5.7%
  • PowerShares DB Energy (DBE), 1.8%, 6.1%
  • PowerShares DB Commodity (DBC), 1.5%, 4.7%
  • iPath DJ AIG Grains ETN (JJG), 1.4%, 2.0%
  • iPath DJ Copper (JJC), 0.0%, 3.1%

By comparison, the SPDR S&P 500 Trust (SPY) is down -0.8% for the last five days and up 0.8% for the month.

In all likelihood, the most reasonable answer for a bounce-back in precious metals, oil and even certain industrial metals is the probability that the U.S. Federal Reserve will eventually embark on QE3. To do so, it will electronically create U.S. dollars that did not exist previously so it may buy up more Treasury bonds and mortgage-backed bonds. Since commodities are priced in U.S. dollars, the value of those commodities should rise with more dollars in existence.

In fact, one can easily see these price movements. As the Powershares Dollar Bullish Fund (UUP), has strengthened over the last 18 months...

... PowerShares DB Total Commodity (DBC) has weakened considerably.

Of course, there's something else that investors should notice -- a shift may already be in the works. On behalf of the commodity space, DBC has recently entered an uptrend, while the greenback via UUP has recently dropped below its long-term 200-day trendline.

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