The Commodity Bull Market

By Blake Robben   ISSUE 609 | SEPT 2007

Over the next five years, the major commodity indexes could double. Are you positioning yourself long term for such a possibility? Think about the basic things you buy everyday. Are they getting more expensive or less expensive?

Investors are always looking for growth. Many investors look for growth in the stock market, but ignore the potential of the commodities markets. Commodities offer a unique alternative to stocks for growth. There are five key commodity futures markets that I think traders and investors should focus on in the coming months: gold, crude oil, coffee, cocoa and sugar.

Gold

The market I like best right now is the gold market. In the wake of the September 18 Federal Reserve Board policy meeting, COMEX gold futures passed their 2006 high of $732 an ounce, rising as high as $747. The recent rise in gold can be attributed partially to the Fed's decision to cut interest rates, which some worry may spur inflation. And because gold is considered an inflation hedge, we are seeing new highs not seen since 1980. A weaker U.S. dollar has also helped gold make gains. The euro has recently hit an all-time high against the dollar, rising above $1.41.

I feel one of the best ways to protect yourself against the falling dollar is to buy gold. Where is this market going? I wouldn't be surprised if gold gets close to reaching $1,000 over the next year.

Crude Oil

Crude oil is another key market to watch. Like gold, crude oil is also making new highs. The November futures are hovering near $82 a barrel. If we take into account the increased demand from places like China and India, along with a limited supply, as production nears capacity, we still have plenty of room to reach even higher highs. Add some unexpected supply disruptions with potential geopolitical conflict, and you get a recipe for crude oil reaching $100 a barrel.

Coffee

December coffee futures reached an eight-month high on Tuesday, September 25, near $1.35 a pound. However, speculative profit taking led this market to trade closer to $1.30 on Thursday, September 27.

Keep in mind that in 1997, this market traded around $3. Although I'm not expecting this market to reach $3 any time soon, this gives us perspective. Even if coffee is trading near eight-month highs, I still see room to gain more ground. My first target range is the $1.40 to $1.50 area. If the market hits these levels, then I believe coffee really has some potential.

Cocoa

I'm a little more bullish coffee then cocoa, but nonetheless, cocoa is another interesting market to watch. Cocoa futures did touch $2,150 a metric ton in early July, but then backed off. It's been back and forth since then in this market. December futures traded near $2,023 on Thursday, September 27.

If you plan on going long this market, I would suggest putting your stop at $1,750. If cocoa takes out $1,750, then I think it has some lower levels to go.

Sugar

Sugar is another commodity I like in the long term. A lot of people don't realize it, but Brazil uses all sugar-based ethanol to run their vehicles. This makes them less reliant on the Middle East unlike us here in the United States. In 2010, Brazilian distributors are expected to sell more ethanol than gasoline, the Gazeta Mercantil newspaper said. The popularity of flex-fuel cars in the country will help ethanol sales over reach gasoline sales.

Fundamentally, we still currently have excess supplies. This is part of the reason why we've had this downward trend over the last couple years. However, any supply problems going forward from here gives the market really potential to move up. On Thursday, September 27, ICE/NYBOT sugar #11 March futures traded near 10.19 cents a pound. This market has been as high as 19 cents back in January, 2006.

If you look at the chart below, I think this is a huge bottom. We have broken the trend line. I would be accumulating sugar long term. In my opinion, the true economic value of sugar is between 14-15 cents. Over the next year, I'm looking for sugar to possibly double. I don't think we can go much lower than 8.37 cents so I would suggest placing your stop near that area if you are looking long term in this commodity.

Trading with a Time Frame

So how do we go about positioning ourselves to take advantage of bull markets in these commodities? It's most important to have a time frame when you are trading. If we are talking about the long term in commodities, I would consider that six months. Short term would be considered a day, and intermediate term, one month. The longer your time frame, the more you have to account for a drawdown, or losing period.

I would recommend leveraging yourself at least 50 percent when trading for the long term. For example, let's say we look at the gold contract. If the market is at $735 and each contract is 100 ounces, by multiplication we get $73,500 per contract. If you're in the trade for the long term, you should have 50 percent of this amount, or about $36,750, backing your one contract. Of course, this example reflects a large contract and account. Smaller investors can participate in the gold market through mini gold futures or options.

Why are we leveraging ourselves so much? The longer our time frame, the more room there is for variance. You don't want to get stopped out of your position and you don't want your account to go debit before the market goes our way.

One of the main reasons people blow out their accounts is because they over-leverage themselves. If you look at the sub-prime mess that is going on in the economy, the same thing is happening there. The problems in sub-prime are a result of people over leveraging themselves in real estate. There is a way to trade commodities successfully, but you have to do it in a disciplined manner. You have to have a game plan.

Of course, you can tailor a specific strategy depending on your particular account size and risk tolerance. Feel free to contact me for more ideas.

Blake Robben is a Senior Market Strategist with Lind Plus. You can contact him at 800-266-0551 or via email at brobben@lind-waldock.com if you have questions on this topic or to discuss specific trading strategies for your unique situation.

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

Futures trading involves substantial risk of loss and is not suitable for all investors.

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

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