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Bottom of the Commodity
Index?
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Q: Jay, I heard you purchased a 1.5% position in RJI, the Rogers Commodity Index ETN. Why did you do this?
A: Rogers has been buying RJA, RJN and RJI for several weeks. This is the only one I didn't own. Since it covers the entire commodity market (36 commodities), it should be the safest, and one which best represents the whole commodity market.
Q:
Why did you do this now?
A:
For several months the CCI (Continuous Commodity Index) has been making a rounded bottom, and has turned up. (See
the CRB Index,
which is similar to the CCI.) Since commodities are the major asset class whose fundamentals have been improving all the way through this crisis, and since they are "hated" and no one wants to buy them, all they needed was a trigger to start the next leg up. I think they got it last week when the Fed announced its new huge quantitative easing (i.e., printing or borrowing money to ward of deflation.) That's not a guarantee, but you are buying commodities at fire sale prices.
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Q: But
RJA, RJN, DBA and DAG have all gone up around 10% in the last couple weeks. How much more do you expect them to go up?
A:
That's only a beginning if the second leg of the secular commodity bull has begun. I have no interest in trying to time small moves, or trade in and out. I don't have a clue what path the trend will make. I only know they are at bargain prices, and I wouldn't even be thinking about selling until the index is back to its 2008 high, which would be up 172% from its recent low (as measured by
RJI).
Q:
Do you think the DJIA and the S&P500 will go up the same in the medium term?
A:
As stated numerous times recently, I expect a significant rally in the Dow and S&P. But the working assumption of my experts is that unlike commodities, stocks are in a secular bear market likely to run until 2015-2020. The only way I would own stocks (other than gold and silver mining shares which I am very bullish on) is to hold an offsetting short position in stocks to fully hedge the long positions. That's the way the experts do it. In other words, what is
occurring now I would interpret as a bear market rally in stocks, with new lows ahead, whether in 2 weeks, 2 months, 6 months or 2 years, I don't have a clue.
Q:
You've mentioned before that the market hasn't capitulated and we may see the DJIA go down to 3800 (see article on Dow Gold ratio). If that's the case, do you expect commodities to follow at that time, or do you expect them to detach and remain strong even if the DJIA keeps going down?
A:
The 3800 is a pure wild guess only, a point at which I felt gold and the Dow might equal each other, as they have in the past (e.g. @ 800 in 1980). History also has taught us that commodities and stocks detach during these secular moves. I expect to make money on my commodities even if stocks go back down. This has happened more than once in the past.
Q:
What's the difference between an ETF and an ETN?
A: An ETF is a mutual fund holding actual listed securities (or commodity futures), and trades on the exchange like a stock. An ETN is a note (liability) of the issuing company, whose value is based on a group of underlying assets (stocks or commodity futures). In order of risk, the safest would be an ETF holding stocks or other assets with no leverage or
counter party risk. Next safest would be an ETF holding commodity futures contracts. Highest risk of the three would be the
ETN, a direct liability of the issuing company, based on commodity futures for valuation. It's good to know Rogers' ETNs are spread among 10 different commodity firms. It's also important to understand these are speculations, not suitable for money you can't afford to lose.
Q:
Do you know of any safer way to purchase physical agriculture and energy commodities?
A:
At this time, I don't. I wish I did. That's the reason I have a 10% limit on my total commodity ETFs and
ETNs.
Q:
How do you classify this in your physical commodity part of your portfolio, and do you plan to set a maximum limit?
A:
It would be physicals funded by ETFs and ETNs, with 10% total limit (5% Ag and 5% energy as stated in Jay's Portfolio. I'll change the word "energy" to "other" now that I have purchased the Rogers Commodity Index). With the purchase of
RJI, I am now at 7.5% total.
Q:
So besides commodities, what else are you considering buying in the next few weeks and what will be your target prices (if any)?
A:
I'm not considering any other purchases at the moment. I don't want to reduce cash any more now. If gold drops to 700, I'll definitely add something to gold and silver. I would give that a 40% chance. You might assign reliability to that about like the weatherman.
Q:
China is becoming quite vocal now about a new global currency to replace the US dollar as a world reserve currency. (For example,
see China Urges New International Reserve
Currency.) Do you think this will lead to much change in any market in the near future?
A:
I honestly don't. I read an editorial yesterday which theorized that it would be at least 10 years before the world could have a new reserve currency. I don't have an opinion on this estimate.
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