Although some commodities have had a strong start to 2013, many have seen severe weakness to open up the year. This has been especially true in the beaten down base metal space, in products such as aluminum, zinc, and copper.
These metals have been victims of relatively sluggish conditions in some key emerging markets like China, as well as worries over continued dollar strength. This currency issue has been especially bad this year as the U.S. dollar has appreciated significantly, reversing a long trend in the space.
In fact, not only has the dollar been strong, but it has actually been surging against a wide range of other global currencies. The dollar has recently broken out above long-term moving averages, and thanks to ongoing issues in Europe, Japan, and Great Britain, the rise of the dollar could continue for quite some time.
If this situation holds firm, the bad news could continue for the volatile and dollar driven base metal ETF, the PowerShares DB Base Metals Fund (DBB). This ETF has slumped significantly thanks to the trends outlined above, and there is little hope for a reversal in the near term.
Consider the following chart of the base metal ETF against the dollar ETF, UUP:
As you can see, there is a pretty significant inverse correlation between the dollar and this base metal ETF. This trend is also apparent over longer time periods as well, suggesting that investors who want to delve into this space should pay close attention to the dollar’s movements.
And given how uncertain the euro has been trading with all of the Cyprus issues, the dollar could continue to gain. This may be especially true if investors add in the threat of a triple dip recession in the UK, and a focused effort by Japan to weaken their currency against the greenback.
This situation is further reflected by the chart of DBB on its own. The fund recently saw its 15 day SMA break below its longer-term 200 day SMA, implying further bearishness ahead.
For these reasons, we currently assign DBB a Zacks ETF Rank of 4 or ‘Sell’. This means that we are looking for further weakness in this ETF over the course of the next year.
If recent history is any guide, this could definitely be the case, as several key currencies are expected to have down years in 2013 as well. This is extremely important for the base metal space, and along with relatively sluggish demand, it could keep DBB and other base metal ETFs in check throughout the year.
Instead of this troubled base metal ETF, investors could look to other commodities which could be better poised to take advantage of the current market trends. One such segment is definitely in the precious metal market.
However, we aren’t talking about gold here, as some of the key white metals—specifically platinum and palladium—look to be top performers in 2013. These look to be well-positioned to take advantage of rising demand thanks to a strong car market, while they also have solid industrial applications beyond the automotive space as well.
While it is true that these two may be hurt by a strong dollar as well, they can easily overcome this thanks to some significant supply concerns. Investors are starting to worry about these supplies meeting demand so this could help to mitigate many of the worries that are currently afflicting the base metal ETF market.
Furthermore both of these metals can easily be accessed via ETFs, specifically with PPLT and PALL. Both of these funds are currently ranked as ‘buys’ by the Zacks ETF Ranking system, so they look to be better positioned than many of their other counterparts in the space going forward.
Base metals are probably a space to avoid, but that doesn’t mean that all commodities are looking weak. Some key products in the precious metal space, such as PALL and PPLT could be better positioned and be solid value plays for some investors, especially when compared to base metal ETFs at this time.
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Follow @Eric Dutram on Twitter
Author is long PPLT
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