The Weekend Commodities Review for May 15th, 2011
A Market Review and Opinion Report By Head Analyst James Mound
For the Week Ending May 15th, 2011
The fallout in silver is nothing short of epic, and the potential for further downside not only exists but should be anticipated. On the way up silver lacked consistent large sellers and had significant physical buying demand. On the collapse an interesting dynamic should be in play. Leveraged speculators and futures investors are likely to bail hard and fast, and without physical demand the freefall could be to sub-$20. However physical demand should spike as long term players scoop value. The problem is that there was not enough time to establish the higher price levels as silver spiked over 30% in one month, making the current levels still relatively high to anyone accumulating physical silver prior to March. This means that ‘value buying’ is unlikely to occur until possibly the $28 level, and even there I do not believe it would hold during a freefall panic.
Gold presents a different story as a large amount of ownership is being used in a savings capacity, with physical holdings being used as an interest bearing physical asset as opposed to a leverage speculative play (not that there isn’t plenty of leveraged physical gold). This means it will be harder for a physical gold selling panic to take place, but that does not prevent a speculative sell in the futures. Right now gold is holding its ground waiting for silver’s freefall panic selling to stabilize. When a fundamental reason to sell gold, like the deflating of commodity prices, matches up with the timing of the continued price destruction of the silver market, there could be a perfect storm scenario for a panic exit in gold.
Rising supplies, concerns over the global demand outlook and declining fear premium all scream to me a top in energies. The Mississippi floods may cause short term issues, but in the end I suspect the end of the ‘concern’ over that supply issue will mark a further catalyst to selling as opposed to a long term realized supply problem. That all being said, dollar strength last week has been the main driver to pressuring commodity prices, and there is exposure to a choppy dollar market in the week ahead, leaving the energy sector room to trade on its own fundamentals.
The stock market is feeling the heat of a global economic recession double dip and CNBC is doing a banner job of getting the rumor out that the real estate market is already in a double dip. I find this one hard to digest because the real estate market never showed real signs of recovery and therefore it is just a continuation of the crash. As for the world economy, bailout money gave the false sense of economic recovery so I am not entirely convinced the world ever experienced a real bounce. The Euro Zone is still in a disaster situation and credit ratings continue to falter. The world is far from out of the woods, but the gains and current price of the stock market certainly represent a bull market, one that is way ahead of the real fundamentals. It is during these stock market pullbacks that the realization of the lack of fundamental footing sets in and turns into negative sentiment which has the potential to quickly become panic selling. I am very bearish stocks and recommend put positions to capitalize on a downside volatility pop. Bonds remain a buy during this period. The dollar got the pop that was expected, but I would not anticipate a straight price breakout. The dollar index really needs to hit 80 to support the argument of a continuation of the long term bull trend that I believe began in 2008. Nevertheless the dollar index monthly chart offers a heck of a technical argument for a real bottom being set.
The euro and pound remain sells on any bounce. The Aussie and Canadian dollars have likely reached the end of their respective bull runs, but tread lightly in the face of these wicked bull trends and get short with straight puts. The Japanese yen remains a buy regardless of the dollar’s next move and I continue to stand by my forecast that:
The Japanese Yen futures will hit 140 before 80 or I will quit writing the Weekend Commodities Review…forever.
Grains continue to feel pressure on the demand side of the equation, which is where I believe traders’ focus should be as opposed to the typical summer supply-side concerns. Corn and bean ending stock forecasts will continue to get beat up by declining global demand as long as the dollar holds support here and tightening monetary policy continues in countries like China and Australia. Wheat continues to be a standout spread play long against short corn, although the spread has moved quite a bit in the couple of weeks since recommending it, making it a less impressive play despite expecting the spread to widen further.
A bit of a congestion pattern developed in both cattle and hogs last week, but both appear to be short lived pauses before more downside occurs. June hogs would have to break 96.35 to suggest a real trend reversal, while I would be a put buyer on any bounce in cattle.
Coffee’s descent from the highs should come as no surprise as unrealized worries over frost in Brazil combined with a rising dollar and falling oil prices have helped form a top in the market. The Ivory Coast has begun exporting, and the reality is cocoa bulls couldn’t have this come at a worse time as the global demand outlook for cocoa is likely to weaken. Cotton remains a liquidation event, although downside potential becomes less tradable with volatility premiums at unbelievable highs. OJ and sugar remain sells.
*Disclaimer: There is risk of loss in all commodities trading. Losses can exceed your account size and/or margin requirements. Commodities trading can be extremely risky and is not for everyone. Some option strategies have unlimited risk. Educate yourself on the risks and rewards of such investing prior to trading. Past Performance is not indicative of future results. Information provided is compiled by sources believed to be reliable. JMTG or its principals assume no responsibility for any errors or omissions as the information may not be complete or events may have been cancelled or rescheduled. Options do not necessarily move in lock step with the underlying futures movement. Any copy, reprint, broadcast or distribution of this report of any kind is prohibited without the express written consent of James Mound Trading Group LLC.