Although some commodities have had a strong start to 2013, many
have seen severe weakness to open up the year. This has been
especially true in the beaten down base metal space, in products
such as aluminum, zinc, and copper.
These metals have been victims of relatively sluggish conditions
in some key emerging markets like China, as well as worries over
continued dollar strength. This currency issue has been especially
bad this year as the U.S. dollar has appreciated significantly,
reversing a long trend in the space.
In fact, not only has the dollar been strong, but it has
actually been surging against a wide range of other global
currencies. The dollar has recently broken out above long-term
moving averages, and thanks to ongoing issues in Europe, Japan, and
Great Britain, the rise of the dollar could continue for quite some
If this situation holds firm, the bad news could continue for
the volatile and dollar driven base metal ETF, the
PowerShares DB Base Metals Fund ( DBB ) . This ETF has slumped
significantly thanks to the trends outlined above, and there is
little hope for a reversal in the near term.
Consider the following chart of the base metal ETF against the
dollar ETF, UUP :
As you can see, there is a pretty significant inverse
correlation between the dollar and this base metal ETF. This trend
is also apparent over longer time periods as well, suggesting that
investors who want to delve into this space should pay close
attention to the dollar's movements.
And given how uncertain the euro has been trading with all of
the Cyprus issues, the dollar could continue to gain. This may be
especially true if investors add in the threat of a triple dip
recession in the UK, and a focused effort by Japan to weaken their
currency against the greenback.
This situation is further reflected by the chart of DBB on its
own. The fund recently saw its 15 day SMA break below its
longer-term 200 day SMA, implying further bearishness ahead.
For these reasons, we currently assign DBB a Zacks ETF Rank of 4
or 'Sell'. This means that we are looking for further weakness in
this ETF over the course of the next year.
If recent history is any guide, this could definitely be the
case, as several key currencies are expected to have down years in
2013 as well. This is extremely important for the base metal space,
and along with relatively sluggish demand, it could keep DBB and
other base metal ETFs in check
throughout the year.
Instead of this troubled base metal ETF, investors could look to
other commodities which could be better poised to take advantage of
the current market trends. One such segment is definitely in the
precious metal market.
However, we aren't talking about gold here, as some of the key
white metals-specifically platinum and palladium-look to be top
performers in 2013. These look to be well-positioned to take
advantage of rising demand thanks to a strong car market, while
they also have solid industrial applications beyond the automotive
space as well.
While it is true that these two may be hurt by a strong dollar
as well, they can easily overcome this thanks to some significant
supply concerns. Investors are starting to worry about these
supplies meeting demand so this could help to mitigate many of the
worries that are currently afflicting the base metal ETF
Furthermore both of these metals can easily be accessed via
ETFs, specifically with PPLT and PALL . Both of these funds are currently ranked
as 'buys' by the Zacks ETF Ranking system, so they look to be
better positioned than many of their other counterparts in the
space going forward.
Base metals are probably a space to avoid, but that doesn't mean
that all commodities are looking weak. Some key products in the
precious metal space, such as PALL and PPLT could be better
positioned and be solid value plays for some investors, especially
when compared to base metal ETFs at this time.
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30 Days
. Click to get this free report >>
Follow @Eric Dutram on Twitter
Author is long PPLTPWRSH-DB B METL (DBB): ETF Research ReportsETFS-PALLADIUM (PALL): ETF Research ReportsETFS-PLATINUM (PPLT): ETF Research ReportsPWRSH-DB US$ BU (UUP): ETF Research ReportsTo read this article on Zacks.com click here.Zacks Investment
ResearchWant the latest recommendations from Zacks
Investment Research? Today, you can download 7 Best Stocks for the
Next 30 Days. Click to get this free report