Two ETFs to Play the Boom in Metals

11/30/2010 2:58 pm EST

Focus: ETFS

Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

Benjamin Shepherd and Yiannis G. Mostrous, associate editors of Personal Finance, recommend ETFs fronting the top emerging-markets miners and second-tier gold producers, leveraged to the rising price of bullion.  

Hard assets are quickly becoming hot commodities among investors.

The Chinese economy posted strong growth in 2009, leading to a 25% increase in steel consumption, a 42% jump in iron ore imports and a similar rise in imports of coal. The trend will continue this year and in 2011.

Furthermore, India’s economy will soon receive the same media attention lavished upon China. The world’s largest democracy has seen its economic growth gradually catch up to China’s. This means that commodities prices will rise again, once market participants realize the true potential of India’s economy and its implications for commodities demand.

Commodity investment levels in September reached a new high of $275 billion, more than doubling from the December 2008 trough. These investment flows will be critical to continuing appreciation of commodity prices.

Investors’ Base Desires
Given the long-term potential of the commodities investment theme, a number of physically-backed metals ETFs are expected to debut soon. The latest news indicates that the first physically-backed base metal ETF will focus on copper. Nickel- and zinc-focused ETFs are also coming down the pike. These ETFs will bolster metal prices—at least in the short term.

The biggest winners will be those commodities in short supply, namely copper, coking coal, and iron ore. Current forecasts indicate that next year’s global copper production will lag what we saw this year, leading to a copper deficit amid robust global demand. Coking coal—an essential component to the manufacture of steel—is expected to be in deficit for the next five years. A deficit of iron ore is also forecast for the next two to three years.

The proposed $407 million acquisition of Australia-based coking coal producer Caledon Resources (Sydney: CCD) by Chinese provincial sovereign wealth fund Guangdong Rising Assets Management underscores the fact that deal making in the sector remains in an early stage.

Emerging Titans Are a Buy
We’re recommending Emerging Global Shares DJ Emerging Markets Metal & Mining (NYSEArca: EMT). The ETF tracks the Dow Jones Emerging Markets Metals & Mining Titans 30 Index, which represents 30 of the largest companies found in the industrial metals and mining sectors in emerging markets.

The fund’s five biggest holdings are Brazil-based iron ore producer Vale (NYSE: VALE), Russian nickel producer Norilsk Nickel (London: MNOD), South Africa’s gold producer AngloGold Ashanti (NYSE: AU), and Impala Platinum Holdings (OTC: IMPUF), and Chinese coal producer China Shenhua Energy (Hong Kong: 1088).

EMT is a buy up to $25. [Shares traded below $21 Tuesday—Editor.]

Gold Juniors Beckon
We have been bullish on gold since this publication’s inception and still like it. It should remain the primary beneficiary of any future economic uncertainties, particularly concerns about sovereign debt levels. Gold will continue to serve as a hedge in either a deflationary or inflationary environment.

Central banks in emerging economies will increase their gold purchases, which should boost gold prices in due course. Consequently, you should also allocate some funds to gold mining stocks.

We recommend the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ).

The fund’s five biggest holdings are Canada-based Semafo (Toronto: SMF), which has operations in the African countries of Burkina Faso, Niger, and Guinea; Novagold Resources (AMEX: NG), which operates in North America; Alamos Gold (Toronto: AGI), which is based in Canada but operates in Mexico; US-based Hecla Mining (NYSE: HL); and Allied Nevada Gold (AMEX: ANV).

GDXJ is a buy up to $45. [Shares traded near $40 Tuesday—Editor.]

[Tom Aspray noted today that two gold ETFs closely correlated to the GDXJ are flashing technical strength. John Heinzl recently discussed the commodities boom from a Canadian perspective. Last week, Gordon Pape touted a fast-rising uranium miner. Mostrous and colleague Roger Conrad recently recommended the shares of two iron-ore mining giants—Editor.]

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