Soybeans, S&P, Crude Oil and Gold: Will 2008 be Bullish?

By Michael Hinman   ISSUE 611 | NOV 2007

We are living through historical times in many global markets. Crude oil is approaching $100 a barrel, gold is above $800 an ounce and flirting with all-time highs around $850, and the U.S. dollar continues to plunge, making new all-time lows against most major currencies almost daily. All the markets have been affected by the dollar's weakness. The Federal Reserve has started an easing cycle, lowering interest rates 75 basis points since September. Its justification has been to supply liquidity to the damaged credit and mortgage markets. I agree with this philosophy and that a lack of liquidity has essentially been the primary cause of any crash we have experienced in the past. But at the same time, the Fed claims inflation is in check, below 2 percent. I have a hard time believing that, looking at commodity prices and knowing my own cost of living. As far as I'm concerned, it should be criminal to lower rates with commodity prices where they are. This holiday season--and more so all of 2008--should go down in the record books if my overall analysis is correct.

Soybeans

As you can see from the daily chart of soybeans below (January 2008 contract is front-month), this market has clearly been in a bullish trend for some time now. I don't see any weakness in the foreseeable future. There have been a few factors supporting these prices. First, acreage is down as farmers have planted corn over soybeans this year with the hope of capturing increased profit margins. Soybean acreage is down roughly 10 million from last season, and demand is still strong worldwide. Demand for our crops is even stronger given the weaker dollar.

Brazil has a large, if not larger, soybean crop than the United States, and they are having weather issues right now. But the bigger concern may be its currency. The Brazilian real has been very strong, making exports less attractive. Due to the low profit margins with soybeans already, some farmers may decide to plant cotton or some other crop if the currency continues to strengthen and they feel planting soybeans isn't worthwhile. We need that entire soy crop to meet worldwide demand.

I am bullish this market and recommend buying on any weakness for three to six months to come. You can trade outright futures, bullish spreads, or options–any way you'd like to play this move. I would not be surprised to see "beans in the teens," and $12 or $13 in the not-so-distant future seems realistic.

Crude Oil

Crude oil has arguably been in one of the strongest bullish trends of our time. Can I honestly say $97 a barrel is justified? No. But markets don't always make sense and I've been in the business long enough to know it's foolish to try and pick a top. It felt like everyone was long and buying for the past eight weeks. The open interest figures supported that assumption, and because of that, I felt the market was due for a correction to the mid-$80 range. We saw a correction in the January contract from $97.63 to $89.13 this month, which was enough to shake out the weak hands. Now that a good number of speculative longs have bailed and this market is ready to put another leg up, I recommend buying crude oil, and will continue to do so on weakness until I'm proven wrong. I still think this market may need to pull back into the mid-$80s to find long-term support, but I also think $100 and even beyond will be reality next year. I would recommend focusing on buying dips, and I don't see a reason to get out yet.

Gold

Gold is another market that has seen a truly amazing bull run in the past few months. Since August, speculators have been buying day in and day out, regardless of gold's price. I've never seen anything like it. Open interest has gone from near all-time lows to all-time highs in just a couple months. The mid-November decline of about $75 brought some liquidation, but that was minor compared to the buying we had seen. The daily chart left an island up high. For technicians, that's a very bearish sign. Couple that with open interest, and I would not be surprised to see a greater decline in the short-run, to $750 or even $725.

Long-term, I remain bullish and believe we will see all-time highs sometime next year. I have been hesitant to recommend buying recently but may jump in if this strength continues. I'm not overly convinced we'll see new highs just yet, because I feel the dollar is oversold and gold and the dollar have seen a strong inverse relationship. Too many speculators are short the dollar, and the boat is tipping too far to one side. I do see a short-covering rally in the dollar, and gold could find long-term support down to $725. I have heard some unsubstantiated talk there has been central bank selling around $845 area in gold. If that's the case, that level could mark gold's top for at least this year.

However, if problems persist with credit and housing markets, and the dollar continues to plunge, gold will have no choice but to go higher. If gold closes above $850, we could see 2008 or even 2009 bring another $100 an ounce or more in gold.

S&P 500

If my analysis is correct about commodities and the dollar, I see stock indexes having trouble posting any meaningful gains next year. I don't see the problems in the economy getting better, and in fact, I think they will get worse. It is my opinion that we are already in a recession, and 2008 could be one of the worst for the stock market in recent memory. I don't see a crash, but rather a slow decline. We could get a holiday rally, but from a technical standpoint, I see rallies as opportunities to establish short positions. I am trying to be patient and look for good opportunities.

I can't stress enough these markets have been highly correlated with each other, and the weak dollar is pushing all these trends across the board. As long as the dollar is weak, the 2008 trends will be intact. We could see one of the greatest bull runs in commodities in our recent history.

Michael Hinman is a Senior Market Strategist with Lind-Plus, Lind-Waldock's broker-assisted division. He can be reached at 866-471-2048 or via email at mhinman@lind-waldock.com.

Kristina Zurla Landgraf is editor of Lind eWire. She can be reached by email at editor@lind-waldock.com.

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