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“Commodities Corner”: Commodities Take More Hits, But Fay Could Change That
Monday, August 18
by Lee Lowell, Futures Options & Commodities Specialist, Smart Profits Report
Here’s our latest bi-weekly roundup of the commodities markets – with yet more wild action, and a hurricane on its way to Florida as I write.
In stark contrast to the situation just a couple of months ago, the last two weeks have featured extreme selling across the board. No commodity has been spared.
Without a doubt, the energy and metals markets have endured the hardest hits. As I mentioned in the last update, I believe many commodity funds have been liquidating and we’re probably seeing the latecomers to the commodity bull market finally giving up, too.
Late entrants to a market are known as the “weak hands,” because they decide to jump in after a market has already made most of its moves. And once the market turns around against them, they end up bailing quickly.
Another reason for the downslide we’re seeing is the state of the U.S. dollar. When the dollar does well, it usually has an adverse reaction on commodities – a scenario we’re seeing at the moment. So we have a few things working against the commodity bulls.
Oil And Gas Ready For A Short-Term Fuel Up On Fay?
With Tropical Storm Fay making its way towards the southern tip of Florida, we’re going to start with the energy markets this week, since a big chunk of oil and natural gas supplies are located near this area in the Gulf of Mexico.
Last we checked, the crude oil September futures contract topped out at $147.90/barrel on July 11. But as you probably know, it’s dropped like a rock, down to its current level around $114 a barrel – $34/barrel from its high.
That equates to a $34,000 move on one futures contract alone. There’s a possibility it could fall further, but not surprisingly, we’ve seen some volatile action today, as Fay swirls towards south Florida.
However, current projections have the storm steering clear of the major oil platforms in the Gulf of Mexico. And when the short-term dust settles, the downward move could end with oil landing at the $108 area. That would put it right at the 200-day moving average line, which would be its last hope for a bounce.
A Six-Week, $55,000 Move For Natural Gas
Recent action has seen natural gas getting whacked to the downside, losing another 1,500 points or so since our last update.
That equates to a $15,000 move on one futures contract and an unbelievable $55,000 move from its high price on July 2. We’re getting very close to possible support levels here, as the market has now given up all its gains for 2008.
Tropical Storm Fay could have an impact here, as the first potential hurricane to hit Florida. And with more storms likely on the way, this should help possibly prop up the natural gas market.
Gas Chart
Last, but not least, the metals…
Metal Mauling Almost Over?
At the moment, both silver and gold are taking their cues from the oil and dollar markets, just like everything else.
Last week, for example, silver endured a nasty intraday selloff of more than $2 an ounce. Although it bounced during the day, much of the damage held. A $2 move in silver is equal to a $10,000 change in equity – huge for one day’s worth of trading. And this is on top of the large drop it endured the two weeks before that.
This mass liquidation means silver really is extremely oversold from a technical perspective. If the dollar starts to sell off and the oil market starts to move back up, we could possibly see silver have a very nice rebound.
Because both gold and silver tend to move in tandem, the gold market has dutifully followed silver downward.
The yellow metal topped out near $1,000 an ounce back on July 15 and has since shed $200. That’s a $20,000 move in equity – and yet another big swing.
Where to from here? Well, just like silver, gold is way oversold and could also see an impressive bounce if investors start to pile in.
That’s all for this edition. I’ll catch you back here in a couple of weeks.
Lee Lowell
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