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Commodities May Continue Slump Into August, But Buying Opportunities Possible

By Debbie Carlson of Kitco News
Tuesday August 5, 2014 1:47 PM

(Kitco News) - July was the worst month for commodities overall since May 2012, and the weak performance is likely to continue into August, market watchers said.

But weaker markets can offer buying opportunities for savvy traders, they added.

The S&P GSCI lost 5.3% in July, giving up almost its entire gain for the year, and as of Monday has roughly a flat return year-to-date. According to data released by S&P Dow Jones Indices, one of the worst performers in their indexes was unleaded gasoline, which fell 8.1% in July. This is the fifth-worst July on record since 1988 and is also the worst July since July 2008. The agriculture sector lost 8.7% in the S&P GSCI index, falling to its lowest level since July 2010.

Gold and silver also lost value in July. Based on a futures continuation chart, gold prices fell 3.4% in July and silver dropped 3%.

Commodity market watchers said the sector would like to continue to sputter into August.

“I don’t see August as a transitional month, (but) I don’t think we’ll be as weak as we were in July,” said Bill O’Neill, principal with LOGIC Advisors.

Part of the reason, O’Neill said, is that investor participation in commodities as a whole is down, as seen by the net-long positions of speculators in Commodity Futures Trading Commission data. That’s also seen in other ways. George Gero, vice president with RBC Capital Markets Global Futures, said in the Comex market, gold futures open interest hit a record low for the year at 358,996 as of Tuesday’s data.

Volatility is low and that means market participants who use price swings to trade are also looking elsewhere than commodities, said Frank Lesh, broker and futures analyst with FuturePath Trading.

A firmer U.S. dollar is also weighing on commodities as a whole, Lesh said. Since commodities are dollar-denominated, any strength in the greenback can adversely affect commodity prices. He said the dollar strength has been a particular bane for gold. In July, the U.S. dollar index rose about 2%.

August is also generally a slow time in the markets anyway, with many people in Europe and the U.S. taking vacations, so the lackluster action has seasonal tendencies working against it too.

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Some Markets May Continue To Fall; Some Offer Buying Opportunities

Some markets are likely to see persistent weakness going into August, in particular some of the agriculture markets, O’Neill and Lesh said.

Lesh said corn and soybean markets have seen sharp price drops as an almost-perfect growing season in the U.S. has many in the industry forecasting the possibility of record crop production. Good growing seasons are seen elsewhere in the world, so Lesh said he expects grain prices to continue to fall.

But there are some markets that are worth watching for possible strategic buying opportunities, especially if U.S. and global growth picks up.

Lesh said he’s going to keep an eye on copper. “It’s held up better than most,” he said.

September Comex copper prices are around $3.2015 a pound as of Tuesday, but he said if the contract slips to the $3.10-$3.15 area, it may be worth a buy.

O’Neill also said he thought that copper “is a good value” longer-term.

He said he expects gold prices to continue to weaken in August, which is a time when gold can set a summer low and rally into the fall. According to the Commodity Traders Almanac, in the past 38 years, entering a long futures position on Aug. 26 and holding it until Oct. 1 has had a success rate of nearly 60%.

The yellow metal has suffered from a lack of physical demand in the past several months, but Lesh said if gold can fall back to the $1,250s to $1,260s area from its current price of around $1,286 basis the December Comex contract, some of that physical demand may return to support prices.

O’Neill said he remains bearish on gold. One trade he has recommended to clients is a spread trade, to simultaneously buy platinum and sell gold, on the idea that industrial metals like platinum will outperform gold if the global economy picks up.

While global growth normally helps commodities since they are building blocks of any economy, O’Neill was less enthusiastic about buying commodities on a bet of future global growth.

“The economy looks like it’s going to be better, but it’s no ball of fire…. There’s a question on how much it could spur commodities demand,” he said.

By Debbie Carlson of Kitco News; dcarlson@kitco.com
Follow me on Twitter @dcarlsonkitco



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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