HardAssetsInvestor

Written by Brad Zigler  |

June 05, 2009

BASE-Jumping Metals ETNs

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Take a look at that subhead again. Monetary inflation's at 9%. Nine percent. We haven't seen that kind of number since January, when inflation was spiraling downward toward a March low of 6.9%.

(Remember, we're talking about wholesale monetary inflation here, not variances in the cost of goods as metered by the Consumer Price Index; an explanation of how our monetary inflation figure is computed can be found in "A New Low - And An Explanation - For Monetary Inflation").

U.S. Monetary Inflation

Recently, a lot of investors have been betting on the erosion in the greenback's purchasing power indirectly through base metals - that is, by wagering on the increase in the demand and the cost of aluminum, copper and zinc.

No better manifestation of those gambles can be found than the PowerShares DB Base Metals Double Long Exchange-Traded Note (NYSE: BDD), which represents a double-levered take on the performance the Deutsche Bank Liquid Commodity Index (DBLCI) - Optimum Yield Industrial Metals.

As the dollar sold off Thursday, BDD was the day's best-performing commodity exchange-traded product (ETP) winner. BDD picked up 79 cents, or 10.2%, to $8.51. Granted, some of the bang in BDD's move was wrought by its double exposure to the underlying DBLCI subset.

The index is based upon a combination of returns from the base metals index together with the interest earned on the Treasury bills used to collateralize the purchase of a metals futures portfolio.

The unlevered version of the base metals index is reflected in the pricing of the sibling DB Base Metals Long Exchange-Traded Note (NYSE: BDG). Yesterday, BDG closed up 6.8%, still a winner against most ETPs.

This morning's U.S. jobs report took some of the steam out of the base metals ETNs. BDD opened 41 cents (4.8%) lower when the U.S. Labor Department reported better-than-expected job losses. You'd think that the appearance of another "green shoot" on the economic landscape would be bullish for industrial commodities. And it ought to be, but the tug-and-pull of the dollar on commodity prices can trump all else nowadays. Metals are priced for world trade in dollars, and the buck just got a kick in its upside pants this morning after being beat up this week.

If you want to play the base metals game, keep that in mind. Though there's a positive relationship between monetary inflation and metals prices, it ain't perfect.

Quite a bit less than perfect, if you think about it.

Base Metals Vs. Monetary Inflation In 2009