What goes up must come down. And go back up again...
Gravity certainly took its toll on the commodities complex yesterday, as all the recent big hitters took some big hits.
Gold fell some $33 from high to low yesterday, a 3% drop... silver outperformed it by falling 5%... and corn shed 4.7% on the CMC Markets spread betting price for the May contract.
What sparked this sell-off... and, more importantly, what does it mean to anybody looking to make money in the commodities markets (aside from a salutary reminder of just how quickly these hot markets can turn)?
Oil bulls took some profits off the table... and then piled back in...
Well, the fun all started when traders started selling oil to lock in profits ahead of today’s OPEC output meeting. Who can blame them after the 22% rise from down near $85 to almost $104 a barrel over the last month?
America has been calling for OPEC to increase supplies in order to keep a lid on the price and this probably kick-started the round of profit taking... leading to the chunky $3 drop yesterday.
And by the way, $3 sounds like nothing but anyone who knows about spread betting will know that this is indeed a chunky drop. Most spread betting companies let you bet per one cent move on US crude oil. So anyone who had a long position yesterday could have given up 300 points yesterday in the space of just a few hours. Betting £5 per point would have lost £1,500. Easy come, easy go...
Still, the message just out of the OPEC camp is that supplies of crude will not be cut and this led to the oil price stabilizing this morning at around $100. And when the US crude oil inventory data came out at 3pm today, showing inventories are unexpectedly down, the price pole-vaulted back over $103 as the bulls piled back in.
In this commodities bull market, what comes down seems to always go back up... .
It wasn’t just oil that fell yesterday. Other hot commodities took a breather too, as Bloomberg reports:
Sharp fall in commodities is nothing more than a short-term pull back
Commodities plunged the most in almost six weeks, as oil, gold and corn fell from records on renewed concern that a slowing U.S. economy will curb demand for raw materials.
But this is not the time to abandon the commodities bull story...
Yesterday’s sharp fall in commodity prices is clearly nothing more than a short-term pull back, said Profit Hunter’s Manraaj Singh this morning. Just look at the United States. While the Federal Reserve has been cutting short-term interest rates to prop-up its sputtering economy, long-term interest rates have actually been rising.
Why? Because inflation expectations are continuing to rise - and what’s underpinning that is the rise in commodities prices. Under these circumstances, the Fed’s rate cuts are only going to fuel that rise by stimulating demand and weakening the dollar.
In fact, after all this, prices have just come back to levels seen around a week or so ago, notes Simon Denham of spread betting company, Capital Spreads, but sounds a note of caution.
Our clients are now very long indeed of virtually every product (even things like Lean Hogs and Soybeans), he writes, and this may be a worrying position as, if our clients are this way round, then (probably) most retail companies’ clients are also very long. It would not take much to turn yesterday’s little fall into a full blown pull back.
We could well see further price weakness in all our favourite commodities over the coming days... gold, silver, platinum and oil. But we don’t see this as an end to the commodities bull-run... far from it. Yesterday’s drop may turn out to have been a great opportunity to load up on the cheap.
If you heard a beeping noise and the sound of engines in reverse this afternoon, then it may have been the sound of investors backing up their trucks to load up on cheap commodities...
...and driving the price of gold right back to $990 and silver to $20.62, smashing right through yesterday's pre-dump highs.
Volatility... don't you just love it?
Talking of volatility...
How to make money when the markets go nowhere...
I was on the phone to Robin Tracey earlier. He’s the guy behind the most exciting trading strategy I’ve seen in the last nine years in this industry. He runs the new Time Trader service I’ve been working on recently where he makes a great deal of money by trading volatility in the US stock market.
That might sound like an abstract concept but as you’ll see in the next few days when I tell you more about it, it’s pretty straightforward when you have Robin on your side.
Anyway, Robin called me earlier to say that his latest analysis on the American S&P500 leads him to believe that over the next few months, the market should continue to oscillate around the current level, without any major breaks up or down. Whilst that’s clearly not great trading conditions for directional traders who need big movements one way or the other, it’s great for a market neutral strategy like Robin’s.
Robin believes that data showing the open positions of options traders on the Chicago Board Options Exchange points to the likelihood of the market trading at or near to where it is now over the next month. And that would be great for his new service and for his next trade which he’ll be placing in the next two weeks.
It’s the perfect time for a strategy that makes money when the market essentially goes nowhere, says Robin. We’re launching at just the right time and I have a great feeling about the next trade.
I promise I’ll get you details of Robin’s Time Trader service by the end of this week. It will not be for everyone, but if you’re open to a higher risk strategy in the search for potentially great profits, then you’ll definitely want to take a look at it.
Back soon...
Best regards,
Frank Hemsley
Profit Watch
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