Here’s everything you need to know to profit from the best metal ETF on the market.

Forget gold and platinum -– and even exotics like palladium -– the only precious metal that you need to own right now is silver. That may come as some surprise given the rally that gold has had this year, and given the analyst sentiment that has pushed the SPDR Gold Trust ETF (NYSE: GLD) to the world’s sixth-largest holder of gold bullion -– ahead of Switzerland and China.

But from a valuation standpoint, there’s no question that silver is the best metal to buy right now.

Making a value case for a commodity –- like gold, silver, or oil –- isn’t quite as simple as it is with a stock. That’s because while stocks have easily defined assets, the value of a commodity is simply whatever people are willing to pay for it. It all comes down to scarcity, or how much of a given commodity is out there.

In the case of precious metals like gold or silver, the metal is worth something because there isn’t a lot of it out there. Likewise, nonrenewable energy sources like oil are valuable because it’s in limited supply.

Traditionally, investors have looked at the relationship between gold and silver’s prices to determine whether one of the metals presented a good value play. At present, the gold-to-silver price ratio sits at approximately 59:1, which while high recently is nothing compared to its peak of 98:1 back in 1991.

But the fact of the matter is that the gold-to-silver price ratio is a worthless measure of the two metals’ value. To get a more meaningful indicator, let’s take a look at each metal’s “market capitalization” -– the value of all of “above ground” gold or silver multiplied by its price.

The results are startling…

You see, unlike gold, which has limited industrial uses, silver is used in a number of manufacturing processes. Some of these processes, known as non-recoverable industrial consumption (NRIC), result in the destruction of the metal and lower the amount of above ground silver. According to silver analyst Theodore Butler, in the last six decades NRIC has resulted in more silver being consumed than mined – from 10 billion ounces above ground in 1950 to just 1 billion today.

Compare that to gold, which has seen its above ground supply increase 150% to 5 billion ounces during that period.

As recently as 1975, the value of the world’s gold was 23 times higher than silver’s. Today, with depletion taken into account, gold is currently priced 250 times higher than silver. That’s a shocking difference.

And it’s one that suggests silver is grossly undervalued as an investment right now.

The Best of the Silver ETFs

The best way to play silver right now is clearly exchange-traded funds (ETFs).

While buying bullion direct is a good option for silver investors, the premium you’ll pay suppliers — often in excess of 5% — and the costs and risks associated with storage make it a poor choice for the vast majority of investors.

Investing in silver companies also adds a lot of risk over ETF plays. That’s because while precious metals are a point of refuge for investors when stocks are flailing, companies that mine the metals aren’t immune to the market’s overall trend –- they might do “better” than the rest of the market, but in a bear run that has most equities down double digits, “less worse performance” is little consolation for losses.

Not only do ETFs offer pure commodity exposure that’s nearly free of market irrationality, the best funds physically hold the silver bullion that your shares represent.

A vault filled with silver bars is a big draw for investors who are nervous about a fund failing to meet its investment objectives.

Though silver’s ETF offerings aren’t as varied as gold’s right now, there are several funds worth looking at right now. The biggest of the silver funds is the iShares Silver Trust ETF (NYSE: SLV), which has a market cap of $4.97 billion, and is one of the largest owners of silver bullion in the world. Other smaller funds include the PowerShares DB Silver Fund ETF (NYSE: DBS) and newly formed ETFS Silver Trust (NYSE: SIVR).

But in truth, the only silver ETF worth trading right now is the stalwart SLV. That’s because the other two funds lack the liquidity, cost-effectiveness, and options that SLV offers. And right now, SLV is on the verge of a technical breakout that could equal double-digit gains in days…

Taking a look at the chart above, the first thing that becomes clear is the uptrend that this fund has been on for the last year. And year-to-date, SLV has been constrained within a tight trading channel, which it’s currently right at the top of.

While nearing the top of a channel would normally signal a bounce back down, in this case, with SLV currently at a 52-week high and little risk of profit taking, the potential for a breakout above the trading channel is very real. If shares break through the top of the channel at the $17.70 mark, the breakout is underway and it’s time to consider grabbing onto shares.

Supercharging Your Silver Play

As usual, options are the best way to supercharge this silver play. With a move imminent, a shorter-term out of the money call option on SLV packs the highest profit potential. That could mean as much as triple-digit gains by the end of the month…

That said, if your risk tolerance is lower, the fundamental potential of silver easily justifies going with a more conservative option trade for this fund. You can take a look at all of SLV’s available option at Yahoo Finance.

Cheers,
Jonas Elmerraji

October 9, 2009

This Precious Metals ETF Could be Gold’s “Silver Bullet” was originally featured in the Penny Sleuth.

It seems like utilities are the only industry that haven’t had a great year in 2009. That’s a shocking fact for many investors who counted on stable recessionary profits from utilities stocks.

In the past, utilities have been touted for their recession resistance. Brokers even went so far as to call them “widow-and-orphan stocks” because as USA Today’s John Waggoner puts it, “A stockbroker could sell utilities stocks to old Widow Brown (or Orphan Annie) without worrying that the townspeople would someday chase him down Main Street with dogs and torches.”

The torches would certainly have come out in 2008 when the sector shed 27% of its value – and again this year, when utility stocks lost another 30% as the S&P 500 rebounded by 15%.

Indeed, while the average publicly traded stock has increased in valuation by 40% since March, utilities have only seen a 24% reprieve from the depths of the market’s lows.

Believe it or not, that’s exactly why one subset of the utilities industry is such an attractive investment right now.

Why an Industry Mired in Doubt Could Pave Your Path to Profits

Don’t get me wrong; there are plenty of reasons to continue to stay away from the utilities sector as a whole. Utilities stocks are slow growing, they deal with all of the drawbacks of extensive government regulation, and with interest rates again on the rise, the cost of capital is liable to increase dramatically for the second-largest corporate borrower behind the financial sector.

But each of those arguments against investing in utilities is a double-edged sword that falls short when it comes to international utility stocks.

That’s because international utilities that operate in emerging markets are actually growing at a breakneck pace as countries like China and India develop their infrastructure and deliver things like electricity and clean water to their citizens. Overseas, where in many cases utilities have more say in the regulatory process, these companies act like government-sponsored monopolies.

And with dovish economists nervous to overcompensate on the interest front, it’s unlikely that any interest rate increases that we see in the next several quarters will materially hurt utilities stocks – especially those in high-growth areas.

So while domestic utilities continue to be mired with doubt and concern, investing in international utility stocks seems like a pretty exciting recession play right now.

Another of the utilities sector’s biggest draws is dividend income. Historically, utilities are one of the top-paying sectors when it comes to dividends – yet another reason why they’re so well-liked during recessions. When capital gains dry up during a bear market, dividends can often mean the difference between keeping your head above water and sinking with the ship. Even as utilities staged their disappointing tumble last year, consistent dividend income has lived up to expectations.

International Utility Profits Through ETFs

Naturally, one of the best ways to get exposure to international utilities is through exchange-traded funds (ETFs).

At present the ETF offering for utilities is staggering – from broad based utilities index funds like the Utilities SPDR ETF (NYSE: XLU), which is based on the S&P 500’s utility components to the PowerShares Progressive Energy ETF (NYSE: PUW), which invests in utilities that engage in environmentally friendly practices. But for international exposure, there are only two funds that stand out right now…

First is the iShares S&P Global Utilities ETF (NYSE: JXI). This fund, which is based on the utility components of the S&P 1200 Global index offers investors a good spectrum of international utility stocks as well as the stability of a few domestic plays thrown in. The fund’s top five holdings are all diversified overseas utility providers that operate in emerging and high growth markets, including E.ON AG, GDF Suez, and Enel SpA.

A relatively low expense ratio (0.48%), coupled with a 4.81% dividend yield make JXI a very attractive fund right now.

The other fund worth looking at is the WisdomTree International Utilities Fund (NYSE: DBU), which has thinner volume than JXI and a somewhat higher expense ratio (0.58%), but offers slightly more exposure to small-cap utility plays. Both funds share a very similar investment philosophy and hold many of the same stocks.

A 20% Upside in the Technicals

Taking a look at JXI’s chart above, even at first glance it’s pretty clear that this ETF is already in a sustained uptrend, one of the most important things that we look for in any trade. In early July, the stock’s 50-day moving average (the light blue line) crossed over its 200-day moving average (the dark blue line). Moving averages, which chart the average price of a stock over a given number of days, give us a glimpse at how a stock is trending relative to its past. Seeing a shorter-duration moving average cross over a longer-duration average is a bullish signal that suggests the real uptrend is only just beginning in the stock.

What’s also significant to us is the trading channel that JXI finds itself in right now. The fund has been bouncing in the same channel since March, and is currently toward the bottom of the channel, primed for a bounce back to the top. If this stock follows the pattern that its been exhibiting for the last six months, there could easily be a 20% upside on a JXI play.

As you might expect from such a closely related fund, DBU’s chart is nearly identical to JXI’s… That means that these two ETFs can be traded interchangeably.

From a fundamental perspective, it’s clear that international utilities are being undervalued by investors right now. And from a technical perspective, these two ETFs look primed to take off in the short term with a potential 20% upside for investors willing to take the plunge.

Cheers,
Jonas Elmerraji

September 11, 2009

These Utility ETFs Are Set to Soar was originally featured in the Penny Sleuth.

On Wednesday, I told you how out of control breakeven prices for oil producers were a sign that oil prices were due to push back into the triple digits. I also told you that one ETF was the best way to make a play for black gold right now.

That’s because only oil ETFs let you take advantage of oil’s moves just as easily as you’d invest in a regular stock…

There are a large number of oil and oil-related ETFs trading on the market right now –including funds that invest in oil futures and those that hold shares of oilfield service companies. But investing in oil through companies that service oil producers is a risky play; as the Exxons of the world continue to see their margins evaporate, they’ll be unlikely to enter into many major development obligations that these companies live on.

Right now, there are only three oil futures ETFs trading on the market: the U.S. Oil Fund ETF (NYSE: USO), the PowerShares DB Oil Fund ETF (NYSE: DBO) and the iPath S&P GSCI Crude Oil Total Return Index ETN (NYSE: OIL).

But of the three, only one stands out as a good investment right now…

For starters, the iPath fund isn’t actually an ETF at all – it’s an exchange-traded note (ETN) — a debt security that’s linked to changes in the crude oil commodity markets. Instead of directly investing in oil futures (like the two ETFs do), this ETN is basically a promise from the issuer that they’ll track the performance of oil. That fact adds a lot of risk to OIL – to be precise, it’s known as counterparty risk – because the investment’s performance isn’t just tied to oil, it’s also tied to the financial health of the issuer. We’ll pass on this one…

Commodity ETFs have taken a lot of heat recently because they don’t perfectly track their underlying commodities. In the last 4 months, for example, the spot price of crude oil has risen 36%, while USO has only rallied 28%. One of the biggest reasons for the huge tracking error is what’s known as “roll yield”. Because futures have expiration dates, USO’s administrators have to constantly trade in their old futures for new ones. Unfortunately, because of the way future prices change over time, they often post a small loss on each position as they roll into the next futures contract.

As time goes by, this roll yield adds up to a big discrepancy between the performance of oil and the performance of USO.

But negative roll yields aren’t a problem for DBO. This ETF, which is based on the Deutsche Bank’s Optimum Yield Oil Index, uses the an optimum yield formula to replace expiring futures contracts with contracts that have the highest possible positive roll yield. And even with the added yield advantage, DBO’s expenses are 37% cheaper than USO’s.

While even DBO can’t track the spot price of oil perfectly, the ETF is the only fund worth considering if you want to invest in oil. And the technicals suggest that right now is the time to open a position …

Maximize Your Oil Profits with Smart Timing

For the past five months, DBO has been in a sustained uptrend from its March lows. Currently, there are several very bullish indicators that suggest DBO is going to keep up – or accelerate – its rally. First, onto the chart:

DBO has been trading in a fairly well-defined channel since March, and while this ETF’s current share price is sitting toward the midpoint, a recent bounce off of its 50-day moving average (DBO’s average price over the trailing 50 days) means that the price has a safety net to keep it from tracking back down to the lower bound of the channel.

Translation: DBO will continue to push higher…

Another bullish signal right now is the crossover of the 50-day moving average over the 200-day moving average. That intersection is a leading signal that means a large positive change is underway in this ETF. Given that this is taking place during a big bullish move, it’s a very strong positive signal for traders.

DBO’s Fibonacci retracements are also looking very solid right now…

Fibonacci retracements are a tool used by technical analysts to determine key points of support and resistance using mathematically significant numbers. DBO has bumped off the vertical blue Fibonacci lines six times in its latest rally – which tells me that this ETF is highly influenced by these levels. Right now, it has just broken out above its most recent high (and the 0% retracement level on the graph above). That’s a significant development because it means that there aren’t any obvious stumbling blocks left for DBO to hit.

All of that said, I’d like to see a healthy pullback to either the lower bound of the price channel or either the 50 or 200-day moving averages before taking a position in this ETF.

As usual, the options on this ETF have a much higher profit potential than buying the ETF itself can provide. If your risk tolerance is higher, there are a number of DBO options with a decent trading volume right now.

Cheers,
Jonas Elmerraji

August 7, 2009

The Only Oil ETF Worth Investing In was originally featured in the Penny Sleuth.

Over the course of the next six months, major changes are going to shape our economy… The only one you should care about is the price of oil. Turn on CNN, Fox News, or CNBC, and you’re all but guaranteed to see a panel of “experts” who are betting on cheap oil. They’re making a huge mistake.

Now more than ever oil is poised to rocket back up to triple-digit prices – and the investors who make smart bets now are going to make a fortune in the process.

Americans are getting misled about the oil crisis that we’re really facing. Despite media contortions that suggest speculators in the futures market are responsible for the monumental price swings in oil that we’ve seen in the last two years, the price of oil isn’t in line with where it should be right now. It’s absolutely true that oil speculation fueled oil’s run-up to $147 last summer, but what the pundits leave out is the fact that oil’s intrinsic price is on the rise regardless of supply and demand.

Prices that aren’t based on supply and demand… What kind of market is this?

The Real Reason for Rising Oil Prices

One of the reasons is the fact that the cost of extracting and processing oil has been rising over the course of the last few years. Peak oil is a frequently mentioned justification for the growing cost of oil extraction. Under the peak oil theory, as we pump the good, easy to find oil out of the ground, we’re left with lesser quality oil that’s deeper in the earth and more difficult (and expensive) to extract.

But peak oil isn’t just a theory; it’s a certainty.

Some oil experts even believe that oil may have peaked back in 2005. If that’s true, it means that as time goes on the price of oil will continue to climb very quickly. That said, the evidence that worldwide oil production has already peaked is anecdotal at best.

The chart above shows worldwide oil production from 1960 to 2005. While crude oil production reached new highs in 2005, we’re currently in a place similar to the late 1970s where oil saw a short-term “false peak” then continued to climb. And for every expert that says we’ve already hit oil’s production peak, there are two that say we have reserves to last us decades more, and that the peak is a long way off.

But that doesn’t change the fact that the cost of oil is rising for producers.  Could it just be a case of poor budgeting?

Right now, a handful of Middle Eastern nations are in a tight spot. Despite access to one of the most precious commodities in the world, places like Saudi Arabia, Dubai, Qatar, and Oman are at serious risk of posting big budget deficits for 2009. For some, like Saudi Arabia, it would be the first deficit posted in almost a decade… For others, like Qatar, this would be the first budget deficit in the country’s history.

And over spending isn’t relegated to the oil producing nations… oil producing companies are feeling the hurt as well right now:

In the last nine months, oil giant ExxonMobil (NYSE: XOM) saw its profits drop 73% to $0.92 per share. That’s a colossal tumble for a company that just a few months before announced the he largest annual profit of any company in U.S. history.

Before the oil boom took off, the operating cost for extracting a barrel of oil was $38. In the last several years, the bottom line break-even price for a barrel of oil has averaged $87.24 – that means that in order for companies like Exxon and Chevron to report a profit from their oil production divisions, they need to see oil prices 22% higher than they are now.

But it gets worse…

Between 2002 and 2008, oil prices rose steadily – at a rate of nearly 18% every year. With projections of $100 oil in the late 2000s (like we saw last year), oil companies and producing nations grew their obligations, building new facilities and spending nearly 60% more on exploration of new oilfields. Those huge expenses are going to have to be priced into each barrel of oil going forward, raising breakeven costs even more.

Why High Oil Costs Mean High Oil Profits for Investors

Even though the cost of oil (and its intrinsic price) has little to do with supply and demand, those two market forces are more or less what drive the market price of oil. In the past year, we saw oil prices fall as far down as $33.87, a painful spot for the oil companies and producing nations that I mentioned earlier.

As long as making a profit on oil continues to be difficult for companies, we’re going to see the playing field contract. Middle Eastern countries will have two choices: tighten their belts and cut spending, or pressure OPEC to cut production and increase their margins.

Make no mistake – high oil prices aren’t going to throw our country into anarchy. We’re not facing disaster at the return of $150 oil. But oil prices must go up, and many investors are just starting to realize it. Those who do are going to find their portfolio values go up as well.

I’ve found an ETF play that is poised to capitalize on the rising cost of oil. In fact it’s set to take off in the next week. That said, it’s not quite time yet – I’m hoping for a healthy dip before we go in for a buy. I’ll be back Friday with the ticker and the reason why it’s the only oil ETF you should bother with.

Remember, I’m releasing this recommendation exclusively to Penny Sleuth readers this Friday…

Cheers,
Jonas Elmerraji

August 5, 2009

Profit from the End of Cheap Oil with This ETF was originally featured in the Penny Sleuth.

While most investors have kept their eyes glued to American markets over the course of the recession of 2008 and 2009, Japan has been host to its own set of economic problems. And as more eyes turn to the Japanese economy, a potentially profitable ETF play is emerging right before us.

Here’s how you could benefit from Japan’s deflationary woes…

Boom, Bubble, and Bust

More than twenty years ago, Japan was experiencing an economic boom unlike anything seen in a generation. The Japanese car industry was gearing up as a serious competitor to the big three American automakers, and Japan’s tech sector was beginning to find its legs. Ever-climbing Japanese stocks became hugely popular in the financial world, and real estate in Japan rocketed along with them.

By 1989, property prices in Tokyo’s most desirable neighborhoods reached as high as $93,000 per square foot, making it the most expensive city in the world. But that prosperity wasn’t to be long-lived.

Over the course of three days in 1990, Japan’s asset price bubble burst, and the Tokyo Stock Exchange lost $400 billion in value. But that was just the tip of the iceberg. Over the course of the next 14 years, the Japanese economy continued its fall and subsequent stagnation – a period of time known simply as “the lost decade”.

Japan’s problem wasn’t unfamiliar. In the years after World War II, Japan’s fast-growing economy became a hotspot for stock market and real estate speculation fueled by high-risk, subprime debt. When the asset price bubble popped, it caused a chain reaction that put the Japanese economy at a standstill.

In 2007, Japan looked like it was finally regaining economic ground as real estate prices rose for the first time since 1990… then the subprime mortgage crisis happened here in the United States, throwing economies across the world into a tailspin.

Ironically, it was almost the exact same circumstances that lead to Japan’s asset price bubble that ushered in the recession we’re facing today.

Does Deflation Spell Doom for Japan?

But the economic problems facing Japan and the United States are far from the same. That’s because while the U.S. has maintained a moderate rate of inflation for the duration of the recession, Japan is currently on a crash course for deflation.

In essence, strong deflation is the equivalent of pulling the handbrake on the economy.

Unlike inflation, where the buying power of a dollar decreases over time (the reason you can’t buy a McDonald’s hamburger for 15 cents anymore), deflation causes the buying power of money to increase. And while that might sound attractive, the economic consequences of deflation far exceed the benefits.

That’s a serious concern according to Fed Chairman Ben Bernanke and his league of economists. “Deflation of sufficient magnitude may result in the nominal interest rate declining to zero or very close to zero,” explained Bernanke to Washington D.C.’s National Economists Club back in 2002.

“Once the nominal interest rate is at zero,” he continued,  “…no further downward adjustment in the rate can occur, since lenders generally will not accept a negative nominal interest rate when it is possible instead to hold cash.”

When holding onto cash is more lucrative for lenders than making loans, credit markets seize, and economic activity screeches to a halt. Deflation also means that current debts – like a $300 car payment – become comparatively huge amounts of money to dole out.

“Profits fall, then wages come down, then consumers stop shopping,” Junko Nishioka, chief Japan economist at RBS Securities Japan told Bloomberg. “And because people aren’t shopping, companies lower prices. That’s the process that we’re starting to see. It isn’t easy to break out of.”

Ben Bernanke and the powers that be have made it clear that they’ll do whatever it takes to avoid deflation right now here in the U.S… But that’s not what’s going on in Japan.

The inflation (or deflation) rate is measured by the Consumer Price Index – an index that measures the prices of a basket of consumer goods. As the CPI drops the risk of deflation rises substantially. In May Japan’s main index of consumer prices dropped 1.1%, the biggest decline since 2002. That marks the fifth straight month of price decreases in Japan.

Land of the Rising Yen

Through all of this, the biggest winner has been Japan’s currency, the yen. As deflationary pressures rise, giving each yen more buying power, the currency’s value relative to other countries’ money rises as well.

Since last August, the yen has gained 17.9% against the U.S. dollar and nearly 30% against the Euro, making it one of the most attractive and powerful currencies right now for Forex traders.

That deflation-driven bull market in the Japanese yen has made for an interesting ETF play as well. At present, there are a number of ETFs and ETNs that trade in concert with the ebbs and flows of the yen. Some of the more popular funds include the CurrencyShares Japanese Yen Trust (NYSE: FXY), iPath USD/JPY Exchange Rate ETN (NYSE: JYN), and WisdomTree Dreyfus Japanese Yen Fund (NYSE: JYF).

While each of these funds has a somewhat different investment objective, FXY is the most heavily traded by far, and most liquid.

As you can see from the chart above, FXY’s price action hasn’t been calm and steady, but it has followed an overall uptrend over the course of the last year. After a double top in January, the fund’s price retraced around half of its previous rally before pushing back up. That’s a good sign that suggests shares of the ETF are set to break or at least match the previous high.

Surging volume on upward price movements confirms that investors see the yen pushing up.

FXY looks like it could be finding support on at its 200-day moving average on a pullback. If that happens, it’s time to think about going long on the yen.

While it’s very likely that the Japanese government will step in and attempt to curb deflation before it starts in earnest, their actions won’t be felt until much later in the game. Currencies are very susceptible to politics and world changes, so keep a tight stop on this ETF if you’re considering a short-term trade.

Cheers,
Jonas Elmerraji

July 15, 2009

Profit from Japan’s Deflationary Woes was originally featured in the Penny Sleuth.