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Coffee to Outperform Precious Metals

Many investors become fixated or lock on to only one or two equity classes due to either personal philosophy or because they become comfortable with them. The analogy, I suppose, would be to always have meat and potatoes for dinner. This can become a stale strategy however, particularly if your dinner was precious metals for the last two years. Not only that, this might cause you to miss out on something that tastes spectacular. For my palate, I like a variety of investment meals, but how I select the best meal at that time is by analyzing the food selection by using my style of relative strength analysis. Ok, enough with the analogies.

On Dec 12, 2013, I recommended the Coffee ETF - JO at 21.95, stating that it could outperform the precious metals, and after being stopped out on Jan 15, 2014 for a 5% profit, I recommended JO a second time at 23.28, again stating that it would outperform precious metals for the next year. The chart below shows my entry points in green and exit in red.

Coffee ETF - JO - Daily

Coffee ETF - JO - Daily Chart
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The next chart demonstrates why coffee should outperform the precious metals. The top panel shows the coffee price in brown, the second panel shows the relative strength ratio of coffee to silver and the third panel is a momentum indicator of the relative strength ratio.

The Coffee/Silver ratio clearly shows a very large declining wedge pattern beginning in the 1990's, that broke above its downtrend line in Jan 2014, while the underlying indicators breakout preceded the price by a few months. This ratio can also be read as an overbought or oversold indicator of coffee to silver, with the horizontal line being fair value. A return to fair value would likely take coffee back up to approximately the 1.75 / lb. area, or about 36.00 on the JO etf.

Coffee - Coffee/Silver ratio - Monthly

Coffee, Coffee/Silver Ratio Monthly Chart
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This is but one example of a commodity and its underlying ETF that will outperform the precious metals. However there are a couple of more ETFs that are just lining up to do the same, which you can find out about on the InvestorKey blog. Gold and Silver are not the only food in town and sometimes better profits can be found at a different restaurant.

 

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