Ralph Shell @ 12:35 PM, Monday December 20 2010
A persistent theme in the investment world during the 2nd half of 2010 has been commodities. From the perspective of the 'experts,' commodities, as an asset class, belong in your portfolio because they just cannot lose. If there is a global business recovery, this will increase commodity demand and prices. Inflation? Problem solved! Commodities are most certainly a hedge against inflation? If the money supply is rapidly increasing, another reason to get rid of the fiat money, and buy some commodities. And, if you are a forex trader, try the long side of countries where commodities abound, like the A$ and the C$.
Having traded commodities for many, many years, in the cash markets, the futures from an office and in the pits of two different exchanges, I offer a few observations. Go with the money flow. If the money is flowing into the long side of markets, go with them. If you are nimble, you can race them to the upside, and lay off your position when the buying reaches a crescendo. However, this technique is not for underfunded novices or anyone who stubbornly clings to a losing position.
For a number of years, hedge fund managers and Wall Street advisers have marketed commodities as a way to enhance portfolio yields. This has been a huge source of new money flowing into the market, and is usually 'invested' for an extended period. If money continues to flow into these markets, the early arrivals in this asset class make money. But their are some unintended consequences in buying a basket of commodities. All commodities are not equal. The demand for some commodities can be altered fairly quickly, with a change in price. Over a period of time the higher price increases supply and reduces demand. Still the front runners generally win. Those that get in and out first make money and others usually lose. Commodities, for investors, are a zero sum game, but quite profitable for the promoters.
Another unique feature about commodities is the lack of insider information. Facts and or opinions acquired from any sources, for the most part, can be used when taking positions. What you know is what you know. What does this mean if you are a hedgie manager chatting with your piers, or with a financial network? This may be another situation where it pays to front run.
As we approach year end, we have already been forewarned that commodities are going to be hot next year.
Well, the chances are some of these bets are already placed, and will be aggressively sponsored approaching year end. Years ago when I was trading wheat in the pit at the Kansas City Board of Trade, my boss in New York would call and tell me, on the close to "bid the market up, but don't buy any." This practice certainly continues, but now is done more secretly online.
The Canadian Dollar has been a very popular long, promoted as a commodity producing country, oil, gold natural gas, timber and wheat. The C$ had been strong threatening to trade at parity with the USD. Specs were loaded up long, over 60,000 contracts of futures at the CME. Since the last COT report, dated 12 14, 2010, the OI has gone down sharply, with the liquidating of another 11,282 contracts on Friday. During the last four trading sessions the C$ has weakened from 100 to 102 versus the USD, and it is my conjecture part of this is caused by specs bailing. Currently we are trading at 1.0180. Tomorrow we receive Canadian reports, the CPI m/m expected to be 0.2% down from 0.4% in the previous period, and Retail Sales expected to be up 0.6% unchanged from the previous period. If these reports give us a break to the 1.0250 are, or more longs liquidate, let's try to sell the USD/CAD in the 1.0250 area. We expect some support prior to year end in the loonie.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.