Weakness in Commodities Present Buying Opportunities
Some are claiming that the commodity bull run is finally over, but I’m a little skeptical. Picking tops in markets can be a dangerous way to trade. The steep drop in crude oil prices and weakness in other commodities such as gold and sugar in mid-July are leading some to believe prices will continue to ease. I think this presents a buying opportunity for a variety of commodity markets.
The U.S. dollar’s recent rally has put a little pressure on gold. Gold futures for August delivery traded below $950 an ounce to as low as $942 on Tuesday, July 22. Gold usually has an inverse relationship with the dollar and any continued strength in the dollar would be bearish for gold.
Gold has also been following crude oil as many other commodities have. Last week’s sell-off in crude oil put a lot of pressure on the gold market. Any continued weakness in crude oil, in my opinion, would most likely be bearish for gold.
I’m expecting weakness in the dollar and would recommend buying any continued dips in gold, but do so with stops to serve as protection against any quick drops.
Although I am expecting a rally in gold, I don’t see it passing $1,000 before the end of the year. I think there is just too much resistance at this psychological level. The last time gold crossed $1,000 in mid-March of this year, it collapsed back to $900 within a month. If gold does cross $1,000, the same collapse in price could happen again. I don’t think gold could maintain a rally above $1,000 unless something serious happens in Iran, or the stock market has a serious setback.
Many are claiming that the bull run in commodities market is over, but I don’t buy it. Take crude oil for instance. Last week, it experienced very heavy selling, falling over $15 a barrel in just one week. Some are attributing this to a global slowdown and reduced demand. However, there haven’t been any signs of reduced demand from India and China. Tensions are still high in the Middle East, particularly with Iran.
Many are forgetting the factors that led crude oil to trade near $150 a barrel. These factors are still present. They haven’t gone anywhere. Therefore, I view the recent weakness in commodities as an opportunity.
It looks like crude oil is at a near-term bottom, with support around $128 a barrel. Crude oil rebounded on Monday, July 21 but fell to a 6-week low under $130 on news of a new storm in the Gulf of Mexico that will likely miss key refineries.
Keep a close eye on not only the weather as we are in hurricane season, but also the geopolitical situation in Iran which could affect crude oil, which in turn affects many other commodities, including gold.
Crude oil has set the tone for many different markets. Sugar, used for food and fuel has also seen a lot of long liquidation in mid-July, much of which was tied to the crude oil market. Sugar has experienced selling pressure over concerns that a slowdown in the global economy could reduce demand.
On July 14, sugar traded above 14 cents per pound, which was a major resistance point before pulling falling to as low as 11.95. October sugar has been near its lowest levels since mid-June.
I think crude oil is having a temporary pullback and will rally again to trade near its recent highs. The crude oil market is tough to play unless you have really deep pockets. A cheaper way to play it is with the sugar market, since it follows crude oil very closely.
There is some bullish news out there for sugar. Russia has refined about 1.7 million tons of raw sugar from January to July, which is down 16 percent from last year. I recommend looking to buy sugar near 12 cents per pound with a stop at about 11.80.
If you prefer to trade options on sugar, there are some very good opportunities for call spreads on the March contract, which gives you a good amount of time. Since prices are constantly changing, feel free to call me at 866-631-6216 if you would like a more specific strategy based on your risk tolerance and account size.
Greg Milkovich is a Senior Market Strategist with Lind Plus. He can be reached at 866-631-6216 or via email at gmilkovich@lind-waldock.com.
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