Do you think people are ready to give up their coffee? Do you think they’re going to stop wearing T-shirts?
No? Then it’s time to look at a couple of “soft” commodities.
Soft commodities are simply things that are grown.
You don’t grow a barrel of oil or a ton of coal. But you do grow coffee and cotton.[ad#Google Adsense 336×280-IA]The other commodities get a lot more attention, so you might not have heard: In the past 18 months, the world has turned its back on these commodities.
Prices have plummeted… But we could be on the verge of an explosive reversal.
Let me explain…
Since March 2011, the price of cotton is down an incredible 58%… Coffee has fallen 39%.
As prices fall, investors get scared. Jason Goepfert tracks just how scared investors are on his website, SentimenTrader. Right now, Jason’s numbers on soft commodities are off the charts…
According to Jason, coffee has never been this hated in the eight years of data he has.
Sugar is a similar story… Today’s public opinion on sugar is at the bottom end of its long-term range. Orange juice and cocoa are the same.
Investors hate just about all soft commodities right now.
When an asset gets this hated, the market for sellers becomes full. From here, demand has nowhere to go but up. As more buyers appear, prices move higher. And when people realize it isn’t the end of the world, prices can absolutely soar.
For example, sugar was this hated in December 2008 and April 2010. In the nine months after those extreme hated conditions, sugar prices soared by 122% and 124%, respectively.
Another tailwind for soft commodities is what Steve Sjuggerud calls the Bernanke Asset Bubble. In short, Bernanke’s “zero percent” policy is going to ignite bubbles in all kinds of asset prices, including commodities.
In Monday’s DailyWealth, Steve mentioned that top fund managers Bill Gross, Jeffrey Gundlach, and Dan Fuss all expect the Federal Reserve to start another round of quantitative easing (QE)… better known as money printing.
If that happens, soft commodities could soar.
As a whole, soft commodities rallied 59% in just four months after the Fed announced its second round of QE in the fall of 2010. I’m positive we’ll see a similar rally if the Fed decides to turn the printing presses on again.
If you’re interested in trading soft commodities, you can do it simply, through iPath DJ-UBS Softs TR Sub-Idx ETN (NYSE: JJS), an exchange-traded note that owns futures contracts in sugar, coffee, and cotton.
There is a big catch here: Because JJS tracks futures, not spot prices, it doesn’t track the spot prices of these commodities very well. In the last eight years, the spot prices of soft commodities are up 210%. But an index based on futures prices is up only 40%.
So JJS is NOT appropriate for a long-term holding. Over time, it will drastically underperform the actual commodities. But in the short term… say six months or less… you can make BIG returns.
Shares of JJS increased 88% in the six months after QE2 was announced. I believe we could see a similar gain if the Fed fires up the printing presses again.
To be clear, we’re not yet buyers of soft commodities like coffee and cotton… yet. And this idea isn’t based on the fundamentals of where soft commodity prices “should” be. It’s a bet on a Fed-assisted rebound from a hated condition.
Add shares of JJS (AMEX: JJS) to your radar screen.
I bet people will continue to wear clothes and drink coffee. And if the trend turns up and the Fed fires up the printing presses, the gains could be huge.
Brett Eversole[ad#jack p.s.]
Source: Daily Wealth