Aluminum Shines Brightly in the Gloom

07/22/2008 12:00 am EST

Focus: ETFS

Nicholas Vardy

Editor, Oxford Wealth Accelerator

Nicholas Vardy, editor of Vardy's Global Bull Market Alert, says a new ETN can help investors profit from soaring prices for the white metal.

With the global stock markets in a seemingly relentless funk, [we are] turning our attention back towards assets and sectors that move independently from this beaten down asset class.

Thanks to the explosion in the number of exchange traded funds (ETFs) and Exchange Traded Notes (ETNs) during the past few years, you have a lot more options to diversify away from the stock market than you did during the last bear market after the dot-com crash.

The set of investment opportunities expanded yet again on June 25th when Barclays announced the launch of 11 new Barclays iPath Exchange Traded Notes (ETNs). Linked to a variety of Barclays Capital Global Indexes, these ETNs provide investors with exposure to the global price of a wide range of commodities previously only available on futures exchanges.

This week's pick stems from the ranks of one of these new ETNs-the iPath Dow Jones-AIG Aluminum ETN (NYSEArca: JJU).

Thanks to its unusual combination of properties, no other metal has as many diverse uses in the home, in transport, on land, sea, and in air, industry, and commerce as aluminum. In the late 19th century, it actually was considered more precious than silver.

More importantly, aluminum is on a tear in a world where bull markets are few and far between. Aluminum hit a record high [recently] after China's biggest aluminum producers, the largest in the world, agreed to cut output by as much as 10% to help alleviate a sixth consecutive year of domestic power shortages. Three-month aluminum futures traded on the London Metal Exchange hit a record $3,380.15 a ton [a couple of weeks ago]. Aluminum now has gained 39% since the start of the year.

The production cut in China will remove 600,000 to 1.2 million tons per year from the aluminum market-enough to eliminate the current surplus of around one million tons per year. A string of more aluminum production disruptions in China, South Africa, and New Zealand is expected and could further impair production, thereby sending aluminum prices soaring even higher.

That's why it came as no surprise when Citigroup recently raised its 2009 aluminum price forecast to $4,000 a ton or $2.00 a pound. Goldman Sachs also raised its aluminum price forecasts by as much as 21%, citing supply constraints caused by cutbacks in China and power shortages in South Africa.

The bottom line? An aluminum price of $4,000 per ton or more seems just a matter of "when," and not "if."

So, buy the iPath Dow Jones-AIG Aluminum ETN (JJU) at market today, and place your initial stop at $39.50. (It closed just below $49 Monday-Editor.)A word of warning: since this is a spanking new ETN, liquidity may be limited. There are no options on this one.

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