Gold Corrects, but Picking Tops in Crude Futile
The euro has fallen against the dollar, and if the trend continues, watch for some commodities to correct, as we’ve already seen happening in gold. Crude oil has been a runaway course, and while a correction could come at any time, it’s futile to try and pick a top even if fundamentals don’t seem to support current prices.
The U.S. dollar gained ground against the euro after reports on German and French business confidence showed weakness, and U.S. weekly jobless claims fell. The U.S. dollar’s weakness has been a key driver in the commodity boom, and if the long-term bearish trend changes, look for trends to change in many commodities too. We’ve already seen gold pull back on speculation the Federal Reserve will soon end its interest rate easing cycle and turn to inflation fighting. Gold is often considered an inflation hedge. June gold futures have slipped under $900 an ounce, building on a sharp decline Wednesday, April 23.
Crude oil, on the other hand, has been tough to short, and those who do try to sell don’t want to hold their positions very long. Don’t try to pick a top in this market. Cut and run if you make a small profit on small moves. The market has been in a pattern of selling off overnight, then rebounding to make new highs in the afternoon. On Wednesday, the U.S. Department of Energy reported a substantial rise in U.S. crude oil stocks, weighing slightly on prices. But the market’s parabolic state has had less to do with supply and demand and seems to be more about emotion and speculation. Any news of global disruptions in places like Nigeria have caused the market to react sharply, and crude oil could reach $120 or higher before a significant correction occurs.
I do think this market might be setting up for the “perfect storm” and it should pull back 10 percent or more. Currently, the June futures contract is down about $2, falling under $116 a barrel. It’s hard to say whether this marks the start of a significant pullback, but if you are long, cover your position with a put, and/or use a stop. You could considering buying a July crude 110 put for about $3,500 excluding commissions, which is your defined risk. This option expires June 25. After the May crude oil contract expired, the volume has become very light and the speculators are hurting. That’s a cautionary sign. The big players are staying out of the market right now and the smaller speculators are getting hurt.
Feel free to call me for more specific strategies in this or other markets to suit your individual risk tolerance, and ask about a special half-off offer for new clients.
Richard Ilczyszyn is a Senior Market Strategist with Lind Plus. He can be reached at 800-605-0095 or via email at rilczyszyn@lind-waldock.com.
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