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Gold And Gas Are Rebounding... Are These 3 Commodities Next?

Tuesday, February 25, 2014 - 2:30pm

When it comes to commodities, investors typically make a classic mistake: They shun them when they are out of favor, and they load up on them when prices are surging.

The contrarian view is so much more profitable.

For example, I noted a few months ago that an extended period of oversupply had pushed coffee prices down to multi-year lows, but added that "signs are emerging that current coffee prices are causing too much distress among coffee growers. Yearlong protests in Brazil, the world's largest coffee producer, has led the government to take action to prop up prices. The iPath Pure Beta ETN (Nasdaq: CAFE), which had lost more than 30% of its value at that point in 2013, has rebounded 50% since then.

Coffee prices are simply responding to the first rule of economics: Falling prices lead to falling supply, which eventually moves below levels of demand, providing a boost to prices. In the case of coffee, a change in growing conditions also affected those factors.

Indeed, the impressive rebound in gold prices and natural gas prices are also the result of changes in demand.

The factors impacting coffee, gold and natural gas are specific to those commodities and don't necessarily apply to the broader asset class. Still, this is a good time to see if any other commodities will be impacted by changes in supply and demand.

Hard Days For Corn
Few commodities have fared as poorly as corn. The Teucrium Corn ETF (Nasdaq: CORN), which tracks the underlying commodity, has plunged in value over the past year and a half, from $52 in September 2012 to a recent $32.

The price weakness is due both to a bumper crop (a record 13.9 billion bushels of corn were produced by U.S. farmers last year) and weakening demand for ethanol. Too much supply and falling demand is never a good combination.

Yet at least the demand side of the equation may be better in 2014 than some had feared. A recent report suggests that demand for ethanol has not fallen as sharply as many had expected. And the drop in underlying corn prices, which lowers the cost of ethanol, makes this biofuel comparatively more appealing, especially as crude oil prices hover near $100 a barrel these days. The supply side will be impacted by weather and growing conditions, which were quite favorable in 2013 but may return to more typical patterns in 2014.

It's too soon to call for a rally in corn, but the low current prices could reverse the supply/demand trends in coming quarters.

Here at StreetAuthority, we've been tracking the impact of a terminated uranium supply agreement with Russia and its potential impact on uranium prices. Yet uranium prices have not yet made the upward move we've been expecting, recently trading for around $36 per pound. That's down from $45 a year ago and more than $70 in early 2011.

However, recent industry news suggests some changes are afoot. A recent report from Australia notes that China has begun to stockpile uranium ahead of an aggressive expansion in nuclear power plant construction.

Also, Japan is set to restart some idled nuclear reactors, which has led analysts to predict a move for uranium prices above $50 later this year, according to a survey by Businessweek.

If you're a subscriber of Dave Forest's Junior Resource Advisor, then you know about his bullish outlook for one uranium-based investment in particular. Dave's key takeaway: Demand for uranium in places like Japan will be more robust than many suspect, and the supply of uranium is also coming under pressure: Dave recently noted that the "Kazakh national uranium company, Kazatomprom, said this month it is halting all new uranium projects because of low prices." Kazakhstan, the world's top uranium producer, is eager to see prices firm up.

In addition to Dave's top uranium pick, investors may also want to consider Cameco (NYSE: CCJ), which is the world's largest publicly traded uranium producer and highly leveraged to an upturn in prices.

In tandem with the rebound in gold prices, silver prices have shown impressive support off of recent lows. The precious metal plunged from around $45 an ounce in the spring of 2011 to just $18 this past summer. In recent months, spot prices see-sawed in the $19 to $20 range, but has just broken out above $22 an ounce.

Is the rebound a harbinger of even better prices ahead? The answer to that question resides in the pace of global economic activity in 2014. Silver has many industrial uses, and after excess inventories were worked off throughout 2013, firmed economic activity may lead to a rebuilding of stockpiles.

Silver Wheaton (NYSE: SLW) remains my favorite way to play silver prices, thanks to its low-cost mining operations. (My colleague Dave Goodboy profiled SLW and a similar gold play a few months ago.)

Risks to Consider: Commodity prices are generally responsive to economic activity. Recent signs out of China and other emerging markets suggest that 2014 may be a challenging year for growth, which could cap any near-term rally.

Action to Take --> One shouldn't put too much emphasis on the macroeconomic backdrop. Specific supply and demand factor also have a clear impact. So it pays to keep an eye on the news for the individual commodities. Bad growing conditions for corn, a restart of Japanese nuclear reactors, and firming industrial activity are the kinds of factors that would impact corn, uranium and silver prices, respectively.

P.S. Dave's latest report is set to be even more lucrative than a rebound in uranium. He's discovered a remote region of the U.S. he thinks could be a "$1 Trillion Boomtown," thanks to its immense reserves of oil and natural gas. Best of all, after visiting this town, Dave identified the three small companies best positioned to profit from the coming boom. To learn more, click here now.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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