The Fed, QE and Commodities

 | Sep 13, 2012 | 11:30 AM EDT  | Comments
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vale

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With all the interest today in the Federal Reserve's decision on quantitative easing, I wondered if there was any value in watching for something everyone knows is coming.

Of course there is.

Look at the price surge going on in metals. It's not just the rise in copper prices -- despite the lowering of Chinese import figures -- look at the rise in Palladium in particular, a metal I recommended as one of the prime plays for 2012 in the commodity space. It's above $680 an ounce and more than $100 higher than late 2011 and early 2012, when I thought it showed a value for investors.

We know that QE is a part of this (heck, I wrote the book on investor money chasing risk assets in commodities and irrationally driving prices higher against the fundamentals that should support them). Recent reports on CNBC and CNN have me uncomfortably on the side of Joe Kernen and Erin Burnett on the Fed's role in driving commodity prices higher, though I'm not on the side of Paul Krugman and Dean Baker -- both brilliant economic minds.

There is a certain amount of causation in commodity prices, as evidenced by the inverse correlation between Treasury yields and commodity prices. And we can assume that some form of continued Fed easing will be announced today, whether in the form of another $45 billion in monthly bond repurchases or in a statement of continued support of low rates for another year into 2015, or a combination of both.

That will continue to put a bid under all commodity prices but most significantly in metals, in spite of the relatively poor fundamentals that continue to underlie them.

Normally, I'd send you to the miners to take advantage of an "endless bid" in metals. But this has proven to be one of the worst plays around. You got a nice response from copper, for example, in the last two weeks, moving above $3.80 from $3.40, but my two "go-to" miners, Freeport-McMoRan (FCX) and Vale (VALE), are still lagging; Freeport has finally showed some signs of life, while Vale continues to be dead money, and both are still down for the year. These are plays that refuse to work, no matter how much I wish they would.

Instead, I like some small plays on exchange-traded funds, despite my hatred of commodity-based ETFs. The primary good is the quick liquidity and ease for the retail punter; the downside is a miserable takeout from the fund managers. But for a short time, maybe a month or two, that can be managed.

I still see palladium as the "unknown" metal with the strongest chance at a continued rally and good percentage gains, despite the 12% clocked already this year. That ETF is the ETFS Physical Palladium Shares (PALL). I believe it will show continued momentum in a way that even copper or gold won't at these levels.

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