With 2012 in the books, it is fair to say it was a mixed year
for commodities exchange-traded products. Due to the European
sovereign debt crisis, slowing growth and demand in the emerging
world and persistent concerns about the U.S. recovery, commodities
were an "on again, off again" asset class in 2012.
Broadly speaking, it was not a good year for commodities as the
Thomson Reuters-Jefferies CRB index closed lower for the second
consecutive year. That is despite the fact that three of the
index's 19 components posted double-digit gains and
13 closed the year higher
. Oil closed down on the year for the first time in four years
while gold extended its winning streak to 12 consecutive years.
With no plan to avert the fiscal cliff in place, but ample signs
that the Chinese economy is recovering, 2013 could be another mixed
bag for commodities
and ETNs. Here are the commodities plays to keep an eye on in the
new year. In no particular order.
iPath DJ-UBS Cotton TR Sub-Index ETN (NYSE:
) How the mighty have fallen. BAL was flirting with $120 in early
2011, but the ETN will head into early 2013 below $50. That caps a
dour run that saw BAL plunge almost 13 percent in 2012 as cotton
futures were hammered due to a supply glut.
Arguably, the worst for cotton futures is already priced in.
However, what may not be priced in is an expected 11 percent
decline in production for the 2013 marketing season,
Farmers devoting less acreage to cotton should help BAL from the
supply side, but increased demand is what the ETN really needs to
move higher in 2013. The U.S. is a major cotton exporter, but
cotton demand, as is the case with so many other commodities, is
held hostage by China. China has recently stepped back into the
cotton market in a significant way, but BAL could be supported by
increased imports by other major cotton consumers such as
iPath DJ-UBS Coffee TR Sub-Index ETN (NYSE:
) Like BAL, JO was doomed by a 2012 supply glut, but this one was
far worse. JO plunged nearly 43 percent as arabica coffee futures
tumbled 37 percent making coffee one of the worst-performing soft
commodities in 2012. Improved supplies from Brazil, which grows
about one-third of the world's coffee, and Vietnam have also
weighed on prices.
Problematic is the fact that the International Coffee
Organization expects record global coffee output in the 2012-13
crop year, which started in October,
according to the Wall Street Journal
Like cotton, coffee closed 2012 well off its 2011 average price.
With Brazil forecasting a sizable coffee crop and soft commodities
under significant pressure, JO's 2013 upside could be limited to
sporadic technical bounces.
Guggenheim Timber ETF (NYSE:
) If the Guggenheim Timber ETF is to be viewed as a play on a
recovering U.S. housing market, which the ETF has been deemed in
the past, then this fund was a disappointment in 2012. CUT gained
23.6 percent, but that is peanuts compared to the 78.1 percent
returned by the iShares Dow Jones US Home Construction Index Fund
There are several key factors to remember about CUT and they can
give investors some feel for how the ETF will perform in the new
year. First, timber futures have historically been as an inflation
hedge, but CUT is an equity-based fund, not a futures play. Second,
CUT's exposure to the U.S. housing market is somewhat limited
because U.S. stocks account for less than 38 percent of this ETF's
Finally, CUT is home to paper stocks such as Weyerhaeuser (NYSE:
) and International Paper (NYSE:
) and that diminishes the fund's housing exposure as well. All that
said, CUT's mixed geographic and sub-sector lineup does make the
fund a direct avenue for playing a global economic recovery. A move
to $21 could represent a new breakout for this ETF.
SPDR Gold Shares (NYSE:
) It would be almost impossible to build this list without GLD, the
world's second-largest ETF by assets. Despite a 2.1 percent drop in
December, gold futures rose about seven percent in 2012, extending
the yellow metal's winning streak to 12 years.
Gold has its detractors and that group would likely point to one
or all of three reasons why 2013 could be the year the gold bubble
finally bursts. Some would say that gold's failure to take out its
2011 highs around $1,900 an ounce is a bearish sign. Some might
argue that the sheer length of the metal's annual streak is getting
long in the tooth. Others might note that gold futures and ETFs
closed 2012 well below the highs notched leading up to the Federal
Reserve's third quantitative easing announcement in September.
Of course, global central banks are running the printing presses
hot and heavy and that should be supportive of gold in 2013. Gold
is coming off a good year in 2012, but traders expected more. With
that in mind, either Chinese and Indian demand and/or safe-haven
buying to start 2013 will have to work in gold's favor or the
winning streak could prove vulnerable.
iShares Silver Trust (NYSE:
) Silver prices and SLV itself enjoyed solid 2012 performances,
though silver bulls may be left with a bad taste in their mouths
because SLV was trading around $34 in October only to close the
year barely above $29.
A frequent battle cry of silver bulls is that half of silver
demand comes from industrial consumers and that should support the
white metal in a global economic recovery. However, that factoid is
often not enough to get silver past its reputation as one of the
market's most manipulated commodities. That is to say what silver
gives, it can take that away and more in breathtaking fashion.
The Fed's plans to pump $45 billion in Treasuries into the
monetary system on a monthly basis starting in January can be seen
as a boon to silver prices because of the potential inflationary
pressures monetary easing builds.
Additionally, the gold/silver ratio is currently in the area of
55:1, meaning it takes 55 ounces of silver to buy one ounce of
gold. That is well above the historical norm of
16:1, but some analysts are saying
two years of depressed silver prices relative to gold represents a
Some of the most bullish assessments of silver call for prices
doubling, tripling or even quadrupling from current levels.
Anything is possible, but do not bet on that level of price
appreciation in 2013. A move by SLV into the $40s is not out of the
realm of possibility, a move to the $60s much less so.
ETFS Physical Palladium Shares (NYSE:
) Often treated as an afterthought relative to gold, silver and
platinum, palladium is coming off a decent 2012 in which PALL added
just over seven percent. Questions concerning palladium's 2013 are
actually quite easy to answer.
First, it must be noted that the metal is an essential
ingredient in the production of catalytic converters for
automobiles produced in China and the U.S., the world's two largest
auto markets. That means global auto demand must remain robust in
order to brighten palladium's prospects.
Second, there is an international component to palladium
production that makes the metal highly volatile. Russia, which is
rarely forthright about its palladium output and stocks, is the
world's largest producer of the metal. South Africa, which traders
learned in 2012 is
vulnerable to labor strife
, is the second-largest palladium producer.
An ideal scenario for palladium bulls would be for Russian and
South African headlines to be quiet in 2013 because production news
out of those countries often leads to increased volatility on both
sides of the palladium trade. In a perfect world, auto demand would
lift the metal. Beyond international risks and auto demand, the big
question surrounding palladium is how much of the
expected 2013 shortfall is already priced in
iPath DJ-UBS Copper TR Sub-Index ETN (NYSE:
) Copper futures jumped 6.1 percent in 2012 and closed at their
highest levels in two weeks during the New Years Eve trading
session. Perhaps more than any other metal, Dr. Copper's price
action is driven by an 800-pound gorilla known as China. The good
news for copper bulls is that the recent spate of economic data out
of the world's second-largest economy indicates a turnaround is in
China accounts for
40 percent of global demand and demand there is
expected to increase 5.5 percent in 2013
There is some risk to the long copper/JJC thesis. For starters,
China has been accused of stockpiling copper, leading some
observers to believe the country's copper consumption is not as
high as copper bulls would like to believe. Even if conspiracy
theories are found to be untrue, there is no debating that
2013 will be the first year in four
that copper output outpaces demand.
United States 12 Month Oil Fund (NYSE:
) The United States 12 Month Oil Fund differs from its more popular
counterpart, the United States Oil Fund (NYSE:
) in that USL tracks a basket of 12 months of West Texas
Intermediate futures contracts while USO tracks the front month
contract. What may sound like a slight difference to those not
familiar with oil trading is actually quite significant. In 2012,
USL lost 8.8 percent, but USO was off 12.4 percent.
That says USL is the better bet for the less active trader and
for those looking to avoid the potential for increased volatility
at the hands of contango. As for what USL, USO and related fare
might have in store in 2013, the International Energy Agency
recently increased its 2013 demand outlook
by 110,000 barrels per day to 90.5 million barrels per day.
Oil could be a vexing proposition for investors in 2013. On one
hand, China's economy is recovering and demand there could slightly
increase. However, if the U.S. goes over the fiscal cliff and into
another recession, oil prices and ETFs like USL will be repudiated.
It is simple math. Even if China's November consumption level of
10.5 million barrels per day remained constant
through the year
, that is still a far cry from the roughly 19 million barrels per
day the U.S. consumes.
Remember this about oil futures ETFs: Oil futures themselves
were lower by 7.1 percent in 2012, but USL, USO and the PowerShares
DB Oil ETF (NYSE:
) all lost more than that.
For more on ETFs, click
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