Commodity ETFs Skyrocket As Dollar Slides, Inflation Fears Mount

by on November 4, 2010 | ETFs Mentioned:

Initially, the response from the markets to Ben Bernanke and Company’s historic attempt to revitalize the markets with a second round of QE was rather muted; U.S. markets stayed relatively flat yesterday after the Fed meeting, and volumes were well within a normal range. But overseas investors apparently had much stronger opinions on the ramifications of the Fed’s tactics, and equities surged across the board Thursday on expectations that the latest developments in Washington could reignite inflation and hopefully give the U.S. economy a badly-needed boost. In nearly every sector of the market asset prices surged; the S&P and Dow both jumped nearly 2%, with the latter climbing back to pre-Lehman levels.

While virtually all risky asset classes saw robust gains, the commodity markets received perhaps the biggest boost on the day. Gold made headlines for its dramatic rise–a $45/oz. gain–that propelled the precious metal up to a fresh record high just below the $1,400/oz. mark. Meanwhile, oil markets also continued their assault on the $90/bbl. level, as crude gained more than 2.1% in Thursday’s trading. “The dollar is under attack and people are moving money from the dollar into other investments,” said Ira Epstein, managing director of the Ira Epstein division at the Linn Group. “Its not just gold, it’s commodities across the board.” In the wake of this flight away from the greenback, dozens of commodity exchange-traded products with both direct and indirect exposure to commodities soared higher on Thursday [also see Hedge Funds Are Buying Up Gold ETFs, Should You?].

Precious Metal Miners

Of the 23 funds in the Commodity Producers ETFdb Category 22 were up at least 1.8% on the day, demonstrating just how widespread the rally was in the commodity markets. Among the top performers were the precious metal miners, which saw huge jumps thanks to skyrocketing metal prices. The PowerShares Global Gold and Precious Metals Portfolio (PSAU), which invests in mining companies extracting not only gold but silver and the rest of the precious metals group as well, jumped by 5.5% on the day [also see Mining ETFs: Eight Ways To Play].

While gold may have been the focus, its gains were weak compared to silver’s incredible one day surge. The cheaper precious metal gained more than 6.5% and saw its price rise above the $26/oz. level. The jump in silver prices translated to an improved outlook for the companies that mine the precious metal; the Global X Silver Miners ETF (SIL) gained 7.2% on the day and traded more than three times its daily average volume. Meanwhile gold miners also saw a huge gain on the day as investors scooped up these securities as a way to play gold prices without establishing an interest in physical bullion. The Market Vectors Gold Miners ETF (GDX) often trades as a leveraged play on gold prices, and Thursday was no different. But the more impressive performance came from the Junior Gold Miners ETF (GDXJ), which invests in small cap miners and jumped 7.8% on the day, giving it the top spot in the Commodity Producers ETFdb Category [also read Playing Precious Metals Through Equity ETFs].

Soft Commodities

Another top performer on the day was the “soft” sector, which continued a prolonged climb higher. While many of these commodities have been surging long before QE2 entered investors’ minds, the extra weakness in the dollar was the perfect catalyst to send these products sharply higher. Among the top performers on the day were the iPath DJ-UBS Coffee ETN (JO) and the iPath DJ-UBS Sugar Index ETN (SGG), which gained 5.6% and 5.3%, respectively. In fact, analysts are beginning to speculate that the returns for these two funds could continue to gain even without the QE and its impact on the dollar. In the sugar market traders “got to 30 cents (a pound) without extensive speculative involvement,” said Peter de Klerk, a senior analyst at U.K. sugar-trade house Czarnikow. “And with the production outlook worsening rather than improving, the price could go higher.” [also see Inside SGG's Impressive Rally]

Meanwhile in the coffee markets, harvests in Vietnam have been delayed by rains while global demand continues to rise in a number of countries–particularly emerging markets such as Brazil. Some analysts expect that Brazil could become the world’s largest consumer of the product by as early as 2012 thanks to its 6%-7% per year growth, suggesting that the run in coffee prices might not be over yet. “The fundamentals are bullish,” said Boyd Cruel, a senior analyst at Vision Financial Markets in Chicago. “There is also a lot of option-related buying.” These significant tailwinds in both the coffee and sugar markets suggest that as the Fed continues to debase the dollar through QE it will only be icing on the cake for commodity ETP investors heading into 2011 [also read Time To Add A Cup Of JO To Your Portfolio?].

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Disclosure: No positions at time of writing.