CEA Monthly Issue – October 2015
Commodity Outlook
No doubt about it, 2015 has been host to one of the most challenging commodity trading environments I’ve seen in quite some time.
Nearly every hard asset has been met with relentless selling the past six to eight months.
This bearish pressure has the vast majority of commodities, and commodity producing stocks, trading deeply in the red this year.
Take copper for example…
The red metal is down 10% the past six months. In the meantime, platinum and palladium have suffered a 13% and 8% drop, respectively. Of course, crude oil and natural gas are struggling with losses of 21% and 10% in the same time period.
It isn’t a pretty picture.
What has commodities struggling so mightily?
Much of the pressure is coming from the strong US Dollar. As you may know, commodities generally trade inversely to the Greenback. When the world’s reserve currency rises, commodities tend to fall.
But that’s just the start of it…
The US Federal Reserve has been leading investors to believe they’ll be raising interest rates soon. In fact, Fed Chairwoman Janet Yellen has stated many times the past few months that the first rate raise in six years is coming this year.
Of course, such action would likely send the dollar even higher.
And let’s not forget China…
Decidedly weak data coming out of the world’s second largest economy has been a big headwind for the beleaguered asset class we track. After all, if the economy of the world’s largest consumer of commodities is coming in for a hard landing, it’s a big red flag for overall commodity demand.
All these factors have created a bearish storm for commodities in 2015.
But take a look at this…
Trading action in rate sensitive assets has been very intriguing the past few weeks.
Case in point, gold and silver are up strongly in October. In fact, gold is pressing higher by 6.2% while silver is rallying nearly 11% since the start of the month. That’s an impressive turn of the tide for two assets that have performed horribly since early 2013.
What’s going on?
Doubt.
Investors are starting to question whether the Fed can raise rates now, or at any time in the near future.
Why?
Not only is global and US economic data coming in decidedly weaker in recent months, but there is still absolutely no sign of inflation in the US economy. In fact, the recently released US producer price index (PPI) report actually revealed deflationary pressures are mounting.
Why then are precious metals rallying so abruptly the past few weeks?
Quite simply, the markets are starting to call the Fed’s bluff…
Investors are finally starting to realize the US Central Bank is between a rock and a hard place. Global economic growth is weakening, yet the Fed has publicly stated it’s ready to raise rates.
Here’s the deal…
When the Fed is forced to back track on its plan to raise rates, precious metals have the potential to break even higher.
With that said, is it safe to get long gold and silver right now?
As tempted as I am to buy into precious metals in hopes of a continued rally, there’s just not enough evidence the past few weeks’ rally will hold up. Keep in mind, there’s very important technical resistance at $1,200 an ounce in gold.
Take a look…
As you can see, the downtrend from the early 2014 highs (red line) has yet to be broken in the yellow metal. As a result, it’s simply too early for longer-term investors like us to get long this market.
What do we do?
We’re forced to wait.
Until gold breaks firmly above $1,200 an ounce, there’s simply too much risk of a sharp reversal back to lower prices.
Speaking of sharp reversals to lower prices…
Our portfolio performance has been decidedly poor in recent months. As you know, we’ve entered multiple bullish positions, all of which have met with our planned stop loss levels.
Let me be perfectly clear on something…
The weak portfolio performance of the past few months is a function of the markets we’re operating in. Fact is, 2015 has been a very challenging time to be a commodity focused investor.
But as I’ve mentioned before, this bearish cycle will eventually run its course…
Investors will soon realize commodities like oil, natural gas, platinum, palladium, corn, soybeans, gold, silver, etc. are simply too cheap relative to their long-term societal significance.
When the collective “ah ha moment” happens in the investment community, I have no doubt capital will come roaring back into commodities.
What do we do in the meantime?
We plan. We strategize. We find the best commodity producing companies at the cheapest prices. We act on carefully selected profit opportunities while controlling downside risk.
But as for this month, I don’t see anything in the commodity space worth making a bullish bet on.
In other words, the risks are currently outweighing the potential rewards.
Folks, sometimes the best use of capital is to have it sitting safely in your account. And that’s what we’ll do until we come across an opportunity deserving our immediate attention.
So I ask you to be patient.
When I see another compelling commodity profit opportunity, you’ll be the first to know!
Category: Commodity Trading
