It seems that many of the commodities have taken turns at being the "hot product" this year. Coffee had a big run this year making 12-year highs as Brazil suffered through increased rain. Gold took its own turn from February to June, moving up from $1,050 an ounce to just over $1,250. Recently, wheat doubled in price almost overnight, based on an export ban from heat-ravaged Russia.
In these commodity plays, there have been fundamental reasons for the spiking prices. But it has been the quick shift of capital and the chase for the quick winning trade that has supercharged these commodity moves. I'm looking at the base metals of copper and aluminum to be the next place where money runs, and I think they will offer a fantastic opportunity.
Both of these base metals now have interesting fundamental stories that will inspire the investor to look at them more closely. We know that base metals, the raw materials required for manufacturing, have been an important metric of emerging market growth. Stockpiles of the metals have long been the metric to indicate just how strong that growth is. And yet, for most of the year, stockpiles at the London Metals Exchange, and the New York Comex, have been at historic surplus.
This has been the nature of commodities price inflation in 2010 -- a steady increase in price in spite of very negative fundamentals.
But over the last month, copper stockpiles at both exchanges have finally begun to fall. Since July 19 in London, stockpiles have dropped from 426,000 metric tonnes to just over 406,000 metric tonnes, an excellent indicator of renewed emerging market growth.
In aluminum, a similar story has developed, with prompt deliveries for scrap aluminum showing real shortages for the first time in two years. Prices for prompt aluminum are now at a distinct premium to forward 30-day deliveries for the first time since 2008. There is finally a bullish supply story to tell for both of these base metals.
That's just what you've wanted this year to find the "latest" and most powerful trade in the commodity space: a real and solid fundamental story to go along with a ravenous investing public looking for the next big commodity boom. Both copper and aluminum have begun to react to this bullish scenario. Since the beginning of June, both metals have rallied more than 20% before moderating somewhat in the last week.
But Tuesday marked the end of the selloff and what looks to be the start of another and stronger rally prompted by increased desire for financial exposure to these base metals.
Here's the moment we've been waiting for to get in. It's now becoming the base metals turn to spike in price going through Labor Day.
There are two dedicated exchange-traded notes we can use to try and capture this upcoming spike: the
iPath Aluminum ETN
iPath Copper ETN
. If we want to try and capture both in one trade, we can look at the
iPath Industrial Metals ETN
Powershares Base Metals ETF
, a mixture of earth metals that include zinc and nickel, but still retain the majority of their commodity interest in copper and aluminum.
All of these products are directly leveraged to the price of the commodities, as opposed to the underlying equities. Normally, I refrain from recommending commodity-based funds and notes. But in this case we're trying to catch an onrush of managed and hedge funds trying to find the next quick commodity spike, and not in it for the long haul. And another quick move in base metals prices will make quicker profits in these ETNs than with underlying stocks like
At the time of publication, Dicker had no positions in the securities mentioned, but positions can change at any time.
Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.
Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.
Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.
Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.