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Looking North of The Border for Gas

This will not be for everyone but, that does not mean it is exceptionally risky, it just has more than the usual number of moving parts.

Natural gas/the US dollar. The general thesis here is that gas prices are going up and the US dollar is going to decrease in value due to the unprecedented actions by the Fed and Treasury. So, if that is what we think, how do we play it in a single trade?

Canada…..

If we go to the Toronto stock exchange we find the CLAYMORE NATURAL GAS COMMODITY ETF (GAS: TSX) and HOR BTPR NYMX NAT GAS CL A UNT ETF (HNU: TSX).

Horizons BetaPro NYMEX Natural Gas Bull Plus ETF (HNU) seeks daily investment results, before fees, expenses, distributions, brokerage commissions and other transaction costs, to correspond to two times (200%) the daily performance of the New York Mercantile Exchange (NYMEX) natural gas futures contract for the next delivery month. The Fund is managed by BetaPro Management Inc.

Their US counterparts are the UNG and DXO. DXO is the 2X oil (USO) ETF and as their is no US 2X natual gas etf, is is the closest cousin to HNU. The HNU is not a currency play because we do not want to hold double ETF for a long period as they decay (2% down day loss > a 2% up day gain). We would use it simply for a trade because there is no US version of it.

GAS simply tracks NYMEX natural gas on the Toronto exchange.

Why would we use GAS rather than its US counterpart UNG? Currency.

Natural gas like all other commodities are priced in US dollars. Inflation, or the devaluation of those dollars causes the price of those commodities to rise (or not fall as much) irrespective of supply/demand/production/use variables.

When we buy GAS on the Toronto exchange, our dollars are converted to Canadian currency to make the purchase. Now, IF the US dollar continues it devaluation trend, when we convert the Canadian currency back to dollars after we sell, those Canadian dollars buy more US dollars and we get an additional bump in our trade.

Well, how has that worked out so far this year? For the past three months the Canadian Dollar/ US Dollar exchange has gone from $.79 to $.89. Essentially that means that if we had done this trade in March, every $.79 cents we invested would have bought us a dollar worth of Canadian assets. If we exited the position today, then each dollar of Canadian assets would be converted into $.89 cents of US dollars. That is a 13% return on just he currency part of the trade, any underlying commodity move excluded.

As for the commodity, the ETF fell roughly 22% during that time span. BUT, with currency buffer, your loss would only have been 9%. So, if you think you are buying natural gas at/near a bottom at these prices and if you think inflation is inevitable, then rather than buffering losses in the ETF, the currency changes with provide additional returns…

Here is the chart:

Now the obvious risk is that the US dollar begins to regain value and the trade works in the opposite direction, meaning upon conversion, each Canadian dollars then buys LESS US dollars. I think, however that risk is minimal. The US government is dead set on stopping deflation and the only way to do that is to create inflationary forces. If history tells us anything about government actions in financial matters, it is that they tend to overstep their efforts. In his case that means that we ought to expect deflation to stop and then strong inflationary trends to begin. This is one swoop devalues to dollar and causes commodity prices to rise, a double win for our trade.

Now, for those of you who look to jump in and out in a day or so, there is no point to doing this trade for the currency reason. Currencies are not going to jump that far that fast to make the trade overly beneficial for exchange reasons. But, if you are doing this for a longer time frame, I think it may work out very well for you.

Things to check

1- What fees does you broker charge you for foreign markets?
2- Any additional requirenments

Like I said at the beginning, this is not for everyone but I am leaning towards it for me…


Disclosure (“none” means no position):Long UNG, none