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The Commodity Investor Q&A

By Matt Badiali, editor, S&A Resource Report
Wednesday, May 13, 2009

Q: I purchased DXO last December. Six months later the price of crude is up at least 25%. However, DXO (double long crude) is only up a measly 7%. I would expect 50%. What gives? – E.E.
 
A: DXO is actually doing what it's supposed to be doing. It's just difficult to time "double" funds like this.
 
DXO is the symbol for the "PowerShares DB Crude Oil Double Long ETN" (yes, someone should be fired for giving it such a ridiculously long name).
 
This fund's goal is to produce double the gains in the price of oil. So if oil goes from $30 to $40 (a 33% gain), DXO should gain 66%.
 
The problem with these "double" funds is their volatility. They simply aren't suited for the average investor. They move so fast, they could almost be considered "options" on the price oil. As you can see from the chart below, DXO had a wild December. It traded as high as $3.50 and as low as $2:
 
 
It's a world of difference between buying this fund near $2 versus buying it around $3.50. DXO is now around $3.50, so it's the difference between losing money and making over 50%.
 
There are also problems with these kinds of funds actually producing the returns they are supposed to. That's a topic for another time. Just know that most people should avoid these funds. Sure, you might be able to time a few of these correctly, but in the long term, most people lose at this game. Double funds are for fast traders.
 
Q: Using your suggestion about natural gas, and putting the facts together (lowest price in ages, lower than the cost of production, producers capping wells), I got in at the recent rock-bottom low of UNG at $12.83 last Thursday. I'm up over 12% in three trading days. Great call, Matt; you rock! – F.W.
 
A: I'm glad somebody got in on this trade. The United States Natural Gas Fund (UNG) had a 30% run since the last time we talked about it.
 
 
Obviously, that run in UNG reflects the rising price of natural gas. It's around $4.30 per thousand cubic feet right now.
 
However, the bad news for bullish investors is that there is just too much gas in North America. The "unconventional" natural gas shales I told you about here will keep a lid on natural gas prices.
 
A brand-new play discovered in Canada, the Horn River Shale, could hold another 100 trillion cubic feet of recoverable natural gas. That's about the same size as the enormous Marcellus Shale in the Eastern U.S. It's enough natural gas to supply the entire U.S. consumption for nearly 4.5 years.
 
These massive natural gas discoveries mean we will have a glut of supply on our hands, so don't count on a return to high natural gas prices. In the short-term, I'm not sure how high UNG could go. If you own it, keep an eye on your trailing stops and don't be afraid to take profits.
 
Good investing,
 
Matt




In The Daily Crux
Market Notes
GM insiders dump their stock... shares fall 22% to fresh 52-week lows near $1.
 
Gold Mining ETF (GDX) hits nine-month high... IAMGOLD, Randgold, and Rubicon hit new highs.
 
Broadcaster Loral Space surges to a new high... shares are up 140% since May 1.
 
Earnings today... Allianz, Dr Pepper Snapple, Jack In The Box, Macys, Whole Foods.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%

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