Commodities Trading
The Smart Profits Report: Issue #356
Friday, September 22, 2006
Commodities Trading: Looking For Profits Amid the Commodities Collapse
By Karim Rahemtulla
Chairman, Mt. Vernon Research
Have you seen the commodities trading sector recently? It makes for some pretty ugly viewing.
In a sudden, rapid, and broad turnaround, several major commodities and other resources are now falling hard.
Most notably, crude oil has backed off its recent record high of $78.40 in July. And with the International Energy Agency lowering its global oil demand projection both this year and next, due to sluggish European economic growth and slowing conditions in parts of Asia, prices are headed down.
Commodities Trading Streak Falling Short
Despite ongoing military battles in Iraq, delicate talks continuing over Iran’s nuclear program, and attacks on Nigeria’s supplies, crude prices have slipped all the way back to the $61 level.
The gold, natural gas and uranium markets have all also dropped recently, with gold prices trading under $600 for the first time since June and natural gas at a two-and-a-half-year low. Steel prices are also falling.
As you can see from the Reuters CRB Commodities Index below, the huge plunge since August is an interesting development that’s well worth your attention. And you need to be prepared…
Looking For a “Bear Washout” In Gold and Natural Gas
As an example of how you could have cashed in on oil’s decline, my LEAPS Trader members last week pocketed quick 26.7% gains on Energy Select Sector SPDR (AMEX: XLE) put options in just one month, as the ETF tracked oil prices and fell heavily. With a current price of $51.55, the downside potential could be as low as $45.
With regard to gold and natural gas, recent broad declines could well be setting the stage for a “bear washout” of all the speculative money from both commodities in the near future. This should signal a short-term low for both, and could propel them higher again.
But don’t think that the story for gold is dependent entirely on the U.S. dollar - there is much more to it. Among the many factors that could see the metal dart higher again: Political uncertainty… economic uncertainty… another hike in interest rates… the upcoming demand from the Indian wedding season… more merger and acquisition activity… and of course the continued secular decline in the U.S. dollar as a fiat currency.
How a Double-Digit Dive Offers Clues to the Blowout
So how will we know when the speculative blowout is in full-force? Well, while there are no guarantees, a good indication will be a 10% plunge in the price of gold in one day. And if that might seem unlikely, it’s certainly happened before.
And, natural gas… well, that can move 20% in a day at any time for a weather-related reason. Just today, October natural gas futures hit $4.67 - the lowest level since February 2004, thanks to a warmer-than-usual winter last year, plus the lack of disruption from hurricanes this season. And that’s why companies like Chesapeake Energy (NYSE: CHK), for example, are in an excellent position. The firm currently sells its forward production for more than $9 per thousand cubic feet (mcf) - 93% higher than the current market price.
Great Trading,
Karim Rahemtulla
P.S. With commodities tanking, some pundits think this represents a good buying opportunity. However, one commodity is becoming the investment of choice among elite entrepreneurs like Bill Gates and Sir Richard Branson. So far, it’s drawn $14.3 billion in new money. And studies show that large production increases will provide an additional 300 million gallons of fuel per year, with production estimated to jump 90%. To find out more about the ethanol industry, check out our special free report.
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Today’s Smart Profits Cribsheet
- Just last week, Smart Profits Report editor and technical analyst Jim Stanton wrote extensively on the prospects for the natural gas market. Find out why low prices today doesn’t necessarily mean you’ll be getting lower energy bills this winter in Smart Profits #354: Natural Gas Usage: What’s In Store For Natural Gas Prices This Year?
- Fellow contributor D.R. Barton also covered the crude oil market in more detail recently, and offered his technical take on why now could be a great time to go long on oil if you’re bullish. Find out the “how?” and “why?” in Smart Profits #351: Crude Oil Trading: A Red Flag for Oil Bears as Technicals Point to a Rebound.
Related Articles:
- Ethanol Investing: Part 1 of The Smart Profits Report Ethanol Forum
- Investing In The Water Market: Turn Water Investments Into Profits From This Looming Global Crisis
- Commodities: How to Create Your Own “Mini Hedge Fund”
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