At $62 Oil & $900 Gold, ETF's Compete In Reflation Trade (DBA, GLD, SLV, JJC, USO, DBC)

While the Fed has noted nothing about inflationary pressures, we have started seeing yet another return to the reflation trade as the economy seems to be bottoming out and all the new printed money comes  into the systems in the months (and years) ahead.  With gold back over $900 and oil back over $60, that is of little to no surprise.  The easiest way for the public to participate in this is via the active exchange-traded funds and exchange-traded notes.  We track the base funds which are liquid and are not leveraged such as PowerShares DB Agriculture (NYSE: DBA), SPDR Gold Shares (NYSE: GLD), iShares Silver Trust (NYSE: SLV), iPath DJ AIG Copper TR Sub-Index ETN (NYSE: JJC), United States Oil (NYSE: USO), and the PowerShares DB Commodity Index Tracking (NYSE: DBC).

PowerShares DB Agriculture (NYSE: DBA) is intended to track the Deutsche Bank Liquid Commodity Index – Optimum Yield Agriculture Excess Return, which is composed of futures contracts on liquid and widely traded agricultural commodities such as corn, wheat, soy beans and sugar.  At $26.85 today, its 52-week range is $21.52 – 42.65; average daily volume is million shares.

SPDR Gold Shares (NYSE: GLD) seeks to track the performance of the price of gold bullion, less the Trust expenses. The Trust holds gold, and is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemption of baskets.  As a general rule of thumb this trades at roughly 1% of the price of gold before fees and before trading volatility.  At $92.04 today, its 52-week trading range is $66.00 to $98.99; average daily volume is roughly 17 million shares.

iShares Silver Trust (NYSE: SLV) seeks to track the price of silver owned by the trust, after expenses.  The assets of the trust consist primarily of silver held by the custodian on behalf of the trust.  At $14.05, its 52-week trading range is $8.45 to $19.17; average daily volume is about 10.2 million shares.

iPath DJ AIG Copper TR Sub-Index ETN (NYSE: JJC) is thinner volume than we normally like to see, but it is the “copper trade” for ETFs and ETNs.  It seeks to reflect the returns available through an unleveraged investment in the futures contracts on physical commodities comprising the Index plus the rate of interest that could be earned on cash collateral invested in specified Treasury Bills.  At $29.32, its 52-week trading range is $17.97 to $57.69.

The United States Oil (NYSE: USO) seeks to track the performance of the spot price of West Texas Intermediate light, sweet crude oil.  The “USO” had had trouble tracking the benchmark because it invests in futures contracts for WTI light, sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas and other petroleum based-fuels.  At $33.77 today, its 52-week trading range is $22.74 to $119.17.

PowerShares DB Commodity Index Tracking (NYSE: DBC) seeks to track the performance of the Deutsche Bank Liquid Commodity index by investing in a portfolio of exchange-traded futures on the commodities comprising the index, or the index commodities. The index commodities are light, sweet crude oil, heating oil, aluminum, gold, corn and wheat.  We find this one more difficult to track because of too many moving parts, but it is still somewhat actively traded.  At $22.10, its 52-week trading range is $17.94 to $46.63; its average daily volume is about 1.8 million shares.

Be advised that these ETFs and ETNs are often taxed at different rates than normal investing, and some may even be taxed as collectibles.  You should always consult with your tax professional before making basic assumptions about your returns and how they are taxed, but that is particularly the case here in these instruments.

As a reminder, these are the ETF and ETN trades for traders which are not leveraged.  There are many variations of leveraged ETF’s and ETN’s which offer double and triple the normal amount of leverage.  When you are right on leverage it is great, and when you are wrong it feels like getting your hand caught in the electric table saw.

JON C. OGG
MAY 20, 2009