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COMMODITY FUTURES FORECAST
WEEKLY REPORT
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Commodity Futures Forecast
Year-End Trends Develop
The erratic behavior of many markets during the early fall has given way to more civilized trends. Our top-picking attempts in several commodities managed to take hold in wheat, corn, and soybeans after false starts. I mentioned that bullish consensus was based upon export prospects that have not actually materialized. While the market adage says you should “buy the rumor and sell the news,” futures markets can often turn too quickly for a wait and see attitude.
I anticipated weakness in grains as year-end marketing accelerated. Indeed, this pressure coupled with better forecasts in South America and Australia has dropped prices through our first and second objectives. I admit I was early with bull spreads in wheat. However, as the full potential of the short side is realized, there may still be a play in the March/July spread. Much depends upon our winter weather. So far, it has been good. Of course, it is early in the season.
Many subscribers called to discuss our short sale in gold at the seemingly low price of 31300. My chart analysis clearly showed technical potential for a test below $290 in the December contract. We made that objective today and our stop has been moved to 29950 to protect profits. In the meantime, I am waiting for silver to follow. It seems unusual for gold to make new lows while silver sustains above $5. Under normal correlations, silver should already challenge $4!
The rumor that large interests are accumulating silver does not make sense. First, fundamental exposure is enormous. The first days of holiday shopping reveal digital cameras are a very hot item. With selling prices from $249 to $699 in the consumer line, these non-silver cameras will become increasingly popular. I am also carefully following trends in medical, industrial, and print imaging to determine the acceleration of the digital movement.
My assessment calls for a significant break in prices. if silver tests below 51250 in the March contract, there will be technical confirmation of a “resistance top.” Given the pattern, I would not be surprised to see a bust below $4 before Christmas. Where might the bottom be? With gold testing below $290, silver could easily make lows below $4.
Another confirmation comes from copper's recent slide. The plunge in copper, which I also anticipated, suggests that producers will increase output to maintain gross income. This creates a downward spiral for copper as the primary metal and silver as a byproduct. Too many analysts appear to be working with old assumptions. Recently, I heard an “expert” say that copper was about to fall below production costs. This statement is absurd. First, different mines have different average costs. Second, new recovery techniques can actually yield a pound of copper for less than 50 cents.
This hardly implies that copper is unprofitable. I would not be surprised to see the metal test 70 cents before a bounce back. If the mills really turn on, gold and silver could suffer even more. This is the present pattern and I do not see any fundamental change for the next six months to a year.
Much of the longer-range attention has focused upon Far East demand. The cultural and religious zeal for precious metals combined with increasing average wealth is assumed to be a major driving force behind higher prices. This viewpoint neglects increasing production, lower costs, expanding resources, and a shift in Far East customs. The generation holding the strong attachment to gold is, in fact, entering the golden years. Young people have long been divorced from gold and silver fever. The generation controlling demand prefers stocks, bonds, and derivatives.
To Love A Short Market
One of the best features of commodity trading is the ability to make money as easily in a down trend as in a bull market. Certainly, the greatest potentials have been in selling metals, meats, crude oil, and grains. The dollar's strength has translated into short side opportunities in the yen, D-mark, and other currencies.
If conditions remain stable, the short side has more potential. Efficiency is pushing prices down. As mentioned last week, energy politics may provide a substantial break that will translate into lower inflation and more trend- making news. Even Fed Chairman Greenspan is forced to agree.
Bear trends in raw commodities give me particular encouragement because we still face uncertainty over El Nino's eventual effect. If the historical pattern follows, we will experience problems as we move toward the spring. Drought can develop in the Southern Hemisphere while floods could hinder the U.S. and Canadian spring planting. The lower prices test now, the more room for explosive uptrends later!
I cannot recall a single El Nino event that did not have an adverse weather consequence. It is a very tentative situation and you should be prepared to act when profit opportunities develop.
Along other technological lines, a recent announcement that the U.S. will allow irradiated meat could spark a debate over “method versus benefits.” As many of you know, I follow trends in diet and preferences to see if demand can be influenced. The “no meat” movement appears to be on the wane. Steak houses are enjoying a surge of popularity and uncertainty has rapidly emerged over the “real” advantages of a low meat diet. Suddenly, red meat is good for you in a big way. From particular proteins and enzymes to the efficiency of B-complex absorption, beef and pork are, once again, being elevated as health foods.
With the advent of irradiation, fear over bacteria like e- coli and mad cow disease will give way to questions about the effects of the treatment upon food. From all I have read, there is no impact upon the food. The radiation simply kills bacteria and viruses. The literature demonstrates that irradiation is far less harmful than chemical preservatives.
We took profits out of the short side of live cattle and they are in a range. If a test of 6500 is made, I might be tempted to go long. Ah...have a steak!
December 4, 1997 Philip Gotthelf
Commodity Futures Forecast
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