Q&A
Futures For You
Inside The
Futures World
Want to find out how the futures markets really work?
DeCarley Trading senior analyst and broker Carley Garner responds to your questions
about today's futures markets. To submit a question, post your question
at https://Message-Boards.Traders.com. Answers will be posted there, and
selected questions will appear in a future issue of S&C.
Time To Buy Grain?
In theory, the grain complex should have seen the harvest lows in the September/October time frame. Should we be buying agricultural commodities?
We all watched in awe as the grain complex shattered their all-time-high price records and continued to march higher during the 2007–08 rally. Subsequently, many retail traders and perhaps even fund managers watched in horror as the grains made their way relentlessly lower in the summer of 2008.
Several theories attempt to explain the magnitude of the up move from ethanol demand, long-only hedge funds and exchange traded fund (Etfs), and sheer market exuberance in the absence of an attractive equity market. One thing’s for sure — the market overshot its equilibrium price. It was unrealistic to expect that market fundamentals could maintain $8 corn, $13 wheat, and $17 soybeans, but nobody knew just high prices might go before falling to a more rational level, and those who tried to “fight City Hall” likely paid dearly.
Now that prices are at arguably more rational levels, yet still seemingly overpriced based on historical standards, grain traders are faced with much more difficult decisions in terms of price speculation. Looking at corn from the 1970s through the early to mid-2000s, the market spent most of its time trading between $1.90 and $4.00. In 2006, corn prices soared above the $4.00 mark and seemed to get somewhat comfortable in the $4.00–5.50 range.
This isn’t the first time that corn has experienced a newly defined equilibrium level. In the late 1960s to early 1970s, corn prices jumped from a range of $1.00 per bushel to $1.60, to a new price floor of $1.90. What we have witnessed in recent years may have been the market repricing to compensate for inflation as well as increased global demand — playing catchup. Previously, resistance became the “new” support. If this theory holds, corn prices should trade above $4.00 per bushel for many years to come.
Assuming this is an accurate analysis, it seems as though $4.30 to $4.00 poses a buying opportunity for position traders. At the time I was writing this, the December corn contract was trading near $4.30, nearly $4.00 off of the high. While this isn’t a bargain in a historical context, it seems to be in the current environment. If the technical and seasonal circumstances are right, buying the harvest lows may be a good play, but overstaying your welcome could prove treacherous.
Bargain Or Money Pit?
The precious metals have fallen out of favor in light of the commodity downturn. Are gold and silver a bargain or a money pit?
In my August 2008 column for Stocks & Commodities, I mentioned my discomfort with precious metals trading. My sentiment stems from the reasoning from which many small speculators are brought to gold and silver in the first place. Too often I hear beginners look to buy gold futures in order to blindly hedge inflation or the depreciating dollar. Worse yet, many are convinced that gold is a safe haven alternative to stocks.
However, many of these traders aren’t familiar with the leverage and risk involved. The importance of timing and the ability to withstand large drawdowns are sometimes overlooked; it is my job to remind them of the consequences.
It is easy to see now, but as gold was topping $1,000 per ounce, all the bullish news was out and the last of the metals bulls had gotten into the market. With everyone who wanted to be long already in the market, there was nobody left to buy, and thus, a correction ensued.
This is an unfortunate but common phenomenon in which latecomers pay the price. However, the issue now becomes whether this is a correction or something more. I have been a gold bear for some time and in fact was early in my sentiment, as I never expected the rally to continue to the levels that it did.
While I remain bearish in the long term, it seems as though the metals markets have flushed out many of the weak-handed longs in mid-September and a relief rally was triggered. At the time of this writing, the December gold futures were trading near $880 per ounce and seemed to have the potential for another retest of $1,000. After all, at $750 level many were giving up on the theory of a continuation of “gold mania” and that is often when prices turn around as they did.
Given the seasonally bullish tendency for gold prices to rally during the autumn and early winter months, the bulls may be enticed to jump back on the bandwagon. It is important to realize that price precedes sentiment; a chart can sometimes forecast a change in market opinion before you get the opportunity to read about it in the newspaper or hear about it on television.
That said, should gold prices reach beyond $1,000 per ounce, I believe it will be a time to become cautiously bearish.