Commodity ETFs: Where They’re Going Next

By Tom Lydon on August 25, 2009 | More Posts By Tom Lydon | Author's Website

Commodity-linked exchange traded funds (ETFs) have certainly been busy lately. China has been on a buying spree, the Commodity Futures Trading Commission may impose limits on the funds soon and investors are finding them more appealing than ever. So, now what? Much of the recent spike in commodity prices has been driven by a weaker greenback. But David Bogoslaw for BusinessWeek asks whether now is the time to bet on commodities. He notes that it’s going to take some examination of economic signals, both good and bad, to answer the question:
* China has been a big driver of global commodities demand for the last decade. China is said to be scaling back on its consumption of commodities as they rein in their stimulus, which has sparked fears that this could depress prices.
* Renewed demand for cars, thanks to the very successful “Cash for Clunkers” program, as well as a recovery in housing, may help sustain demand for certain commodities domestically.
* The direction of the dollar is a key driver. If the dollar continues to weaken, as some feel it might, this could make commodities more affordable for overseas buyers.
* Mining strikes could deplete inventories. One mine that accounts for a third of South Africa’s platinum production may go on strike this week; a strike in Canada is being blamed for the spike in nickel costs.

Agriculture is still a popular segment of the commodity market. Even if China backs off on spending, the country’s citizens could still demand food as much as they were before, one analyst notes. Meanwhile, soybeans are poised to hit a record $20 a bushel as stockpiles in the United States dwindle, report Claire Leow and Susan Li for Bloomberg.The fracas over futures-based commodity ETFs continues as iShares S&P GSCI Commodity Index Trust (GSG: 31.98 +1.35 +4.41%) said it would stop issuing new shares once it hit 55.9 million. Currently, there are 52.5 million shares, reports Ian Salisbury for Dow Jones Newswires.

GSG joins a growing line of funds that have said they’ll stop issuing new shares until the CFTC officially rules on what kinds of caps it would impose on these funds.
Whether it’s time to get into commodities or not, watch the trend lines for signals. Our strategy utilizes the 200-day moving average when looking for opportunities and potential long-term uptrends.