Commodities Soar - Metals Make New Highs
By David Pappas, Archer Financial Services
Commodity futures prices, virtually across the board, have been soaring and some are making new highs. Two of the more interesting metal futures markets are silver and gold. Technical indications from the silver and gold charts remain extremely bullish.
There is a three-wave pattern on the weekly gold chart that started at the October 2008 low, which appears to have been repeated at the recent highs. If this pattern continues, it is likely that silver and gold futures will extend their advance well into next year. A three-wave pattern started at the October 2008 low. In addition, with a falling U.S. dollar and uncertainty of the economic recovery, precious metals are becoming more attractive to investors from a fundamental point of view. The precious metals have always been a safe haven refuge in times of economic turmoil and it appear that this time will be no exception.
Now let us look at some other commodities. For example, corn prices and volume a have exploded recently. Much of the recent price gains in corn futures, including new two-year highs, can be attributed to unexpectedly large usage, along with surprisingly low USDA production estimates.
The USDA shocked the market when they said U.S. 2010 corn yields fell more than expected. The USDA lowered their corn yield estimate by 14 bpa in Illinois, 10 bpa in Iowa, 10 bpa in Indiana and 9 bpa in Nebraska. There is an old adage that small corn crops tend to get smaller and that very well could be the case in the current crop year. There is some talk that the final U.S. corn yield could still drop another 1 to 2 bpa. There are even a few estimates that are as low as 151.0 to 152.0 bushels per acre. This could push December corn closer to 6.00-6.25 or even higher. The trade also believes that if December corn futures can advance to the 6.00 level and above, soybean, meal and oil futures will follow suit.
Cotton futures prices have hit all time highs around $130. It was just last June that cotton futures were trading near the $76 level. Prices began moving higher in June as it became clear that demand for cotton was increasing. At that time, manufacturers feared that a shortage of cotton was possible as the economy recovered. In addition, there were production concerns. There were heavy rains in China, which hurt that nation's cotton crop. This resulted in over a 5% drop in production in 2010. China is the world's largest cotton producer, followed by India and the U.S. Pakistan, which is the fourth-largest producer of cotton, saw its crops damaged by devastating floods this summer. Even though India and the U.S. reported good harvests this year, it did not make up for the production declines in China and Pakistan.
Some analysts believe that the current bull market in commodities is directly attributable to the U.S. Dollar Index falling from a high of 89.00 in June to the current low of 76.00. Also, there are ramped up concerns that a likely new secondary quantitative easing program, or QE 2, from the Federal Reserve will be highly inflationary. The market fears that vast amounts of funds are likely to soon be injected into the banking system, which will be the fuel to propel commodity futures to substantially higher price levels.
In light of most Central Bank's policy of extreme accommodation, along with the improving prospects of a global economic recovery, the price outlook for commodities, in general, is bullish. Many commodity futures markets have recently registered new highs. In my opinion, there are many opportunities to trade commodities from the long side now through the end of 2010. We have many option strategies to take advantage of these volatile moves. Please feel free to call or email me if you have any questions at 877.690.7303 or david.pappas@archerfinancials.com.
