Yet Another Bet on the Commodities Boom — and Booking 50% Gains on the Japanese Yen

This week’s Global Bull Market Alert pick, the PowerShares DB Commodity Index Tracking Fund (DBC), increases your bet on one of the most successful themes in the portfolio — the worldwide commodities boom. Even as the U.S. financial services industry and real estate sector are in a critical state, oil, gold and corn are trading at or near all-time, record highs. All of this makes DBC a perfect bet for this environment as it provides exposure to futures contracts on six of the most heavily-traded commodities in the world: crude oil, heating oil, gold, aluminum, corn and wheat. The weightings — 35% crude oil, 20% heating oil, and 10% to 12.5% of the other four — are also geared toward the energy sector to which you have no exposure yet.

Let’s review why the case for commodities continues to be bullish.

First, demand for commodities is no longer correlated to the health of developed economies. Traditionally, the CRB index, the longest-established commodity index, has correlated closely with measures of the economic strength of developed economies. Yet, that correlation has broken down during the past few months. As commodity prices have surged, even developed markets have slowed down. Today, it’s the huge and growing demand for raw materials from emerging markets that has pushed commodities on their relentless upward trajectory.

Second, supplies of commodities across the board are at their lowest levels in recent memory. Wheat and corn stocks are at their lowest marks, as a proportion of annual consumption, since the early 1970s. Copper stock is as low as it has been since 1990. Production from non-OPEC oil producers, such as the United States, the United Kingdom, Norway and Mexico, has fallen markedly in the past few years.

Third, commodities are increasingly seen purely as an investment in their own right. Historically, commodities provide returns that are lowly correlated with stocks or bonds. That helps large pension funds looking to improve their risk-adjusted return. And introduction of exchange-traded funds (ETFs), such as DBC, has also made it as easy and as cheap for investors like you to trade commodities as it is to trade stocks. Recall that after the dotcom bust, you did not have the opportunity to invest in the range of commodities you can through ETFs like DBC today.

Finally, Cassandras will note that commodities last boomed in the stagflationary 1970s, even as stock markets stagnated. They argue that a slowdown in the United States and cutting interest rates will merely exacerbate inflation, and boost dollar-denominated commodity prices. If the economy is in as deep trouble as the Cassandras say, commodities offer one of the few places to hide.

So buy the PowerShares DB Commodity Index Tracking Fund (DBC) at market today, and place your stop at $31.00. If you want to play the options, I recommend the July $37.00 call options (DBCGK.X). A word of warning. Because commodities have had such a strong run recently, don’t be surprised if there is a pullback in prices at some point. But that does not impair the prospects for the entire sector in this challenging environment.

PORTFOLIO UPDATE

The CurrencyShares Japanese Yen Trust (FXY) hit record highs last week. Because this is a relatively low volatility (and unleveraged) currency play, sell half of your options for a 50% gain. Hold on to the rest, as I expect the yen to continue to appreciate against the dollar. Tighten your stop to $90.50.

You also have gains of 14.78% in Yamana Gold (AUY) and a 56.52% gain in the options. Hold on to both for now. With gold likely to break through the $1,000 mark, I expect the option gains to be in triple-digit percentages during the next few weeks. Raise your stop to $13.50.

Your position in the iShares Silver Trust (SLV) is up 16.26% just in the last three weeks. Tighten your stop to $158.00.

P.S. Join my Eagle Publishing investment colleague Mark Skousen and me for FREEDOMFEST 2008, "The Trade Show for Liberty," on July 10-12, 2008, Bally’s/Paris Resort. FreedomFest will feature more than 88 speakers, 100 exhibitors, and 1,000 attendees. Guests will include John Mackey, CEO of Whole Foods Market, Congressman Ron Paul, a 2008 Republican candidate for president, Steve Moore, of The Wall Street Journal editorial board, David Boaz, vice president of Cato Institute, Robert Poole, Jr., of Reason Foundation, Jeremy Siegel, "The Wizard of Wharton," and Rick Rule, one of the country’s top money managers. Also hear Frank Holmes, Doug Casey, Larry Abraham, Ron Holland, Frank Trotter, Bert Dohmen, Keith Fitz-Gerald, Peter Zipper, John Mauldin, and many more.