Commodities Essential - March 15, 2011

I have come across many predictions over the last week saying that commodities are set to take a serious dive, some with more merit than others. Indeed, most commodities are already pulling back. I put together much of these comments prior to today, but I’ve woken up this morning to find that gold is down, silver is down, copper is down, palladium is down, crude oil is down, cocoa is down and even coffee is down. And these moves are not small.

Much of the recent price action is attributable to the uncertainty emanating from disaster in Japan. It is return of the risk aversion trade that has been absent for several weeks, despite plenty of risk in the market. It is return of the risk correlations that leaves me most cautious about recent moves.

Here are the key ideas why a real correction in commodities is easily possible …

Commodities Essential. 15 March 2011


Crude oil has turned over as I expected. Our position in DTO is up nicely and helping ease the sting of some other positions. I still believe crude oil will work lower (DTO higher), but with some risk premium already worked off crude could very quickly spike to new highs if a catalyst emerges. Since I see this as a shorter-term position, I think it makes sense to tighten up our risk on DTO (PowerShares DB Crude Oil Double Short ETN) and move our stop-loss to our entry point at around $44.65.

DTO (Last Price: $51.90)

Cancel and replace your order tosell all shares of PowerShares DB Crude Oil Double Short ETN, symbol DTO, at $35, STOP; NEW PRICE: $44.65. This order is good till cancelled.