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Commodity Speculation Is Great Again

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Here is my newspaper column from May 6. Hope you find it of interest.


May 6, 2016 Commodity Speculation Is Great Again

It has been a long time since I have read and heard of so much enthusiasm for speculation with the commodity markets. Nary a day goes by anymore without a host of analysts, market gurus and media outlets touting the global rush now underway with speculation. With trading. With buying and selling of grains, metals, petroleum, or livestock. Or, with the so called soft or tropical markets such as sugar, cocoa, lumber and the juice that comes from an orange. Speculating is back vogue!
To twist the words of Donald Trump, the presumptive Republican Presidential candidate there seems to be broad based move afoot to make, “commodity speculation great again.” I certainly hope so because the commodity markets began to leak more than 5 years ago and earlier this year, as measured by the CRB Index, values fell to a new, 13 year low. But across the globe, it does indeed appear as if commodity speculation is great again.
Understand that speculating is neither an art or a science. It is both. It is also neither. The key ingredient for market speculation comes from the fact that it does not matter if prices rise or fall, go north or south. What matters is if there is enough price movement or volatility to offer short term opportunities to make money.
Bloomberg News recently published a piece entitled, “China’s Improbable Commodities Frenzy Leaves Stocks in the Dust.” The article points out that the Chinese stock market that rose to a seven year high in June of last year is down 42 percent to date. The article hints that Chinese stock market investors that bet wrong on stocks are now lining up to buy commodities where the action is fast and furious and bull markets unfolding daily.
Consider the following. In the U.S. the average length of time a crude oil futures contract is held is almost 40 hours. In China, the most active commodity futures market is steel reinforcement bars that have jumped 38 percent in value this year. The length of time a steel futures contract is held is less than 4 hours. Fast and furious indeed.
The U.S. News & World Report had a piece by Debbie Carlson entitled, “How To Invest in Bottoming Commodities.” Here is the opening sentence. “After falling to multi-year and in some cases, multi-decade lows, it appears thatcommodity marketsmight be bottoming.”
Ms. Carlson goes on. “Barclays says the low the Bloomberg Commodity index put in during January's selloff matched the all-time lows last hit in 1999, and since then the index has risen. Investor interest is back in the commodity sector as assets under management for the precious metals, base metals, energy and agriculture markets are rising so far for 2016. That's lifted values, with prices for commodities as disparate as crude oil, iron ore, gasoline, soybeans, coffee and gold all up for the year, too.”
But here is the rub. The move to make commodity speculation great again began in China, spilled over to the United States and other parts of the world in January and February. But the same scenario surfaced a year ago with the Chinese stock market with record setting trading volume and white knuckle intra-day price swings as investors were buying and selling furiously, holding stocks for very short periods of time. They were treating stocks back then as they are treating commodities today.
My point is this. Last June, speculating in the Chinese stock market became so intense and volatile that the market eventually rolled over and crashed and remains 42 percent off the high. Volatility and heightened speculation tends to bring forth such dire results. Nothing ends a bull market quicker and with more certainty than volatility amid erratic price movements.
Now, the same sort of speculative frenzy has surfaced with commodities across the globe. But similar to last spring, signs are surfacing that the speculative fever is breaking across Asia. And from Bloomberg News comes this article entitled, “China’s Great Commodity Bubble Loses Air Before It Can Burst.”
The first sentence in the article states, “Thefeverthat’s gripped Chinese commodity markets is easing.” And the next paragraph reads, “Speculators who traded 1.7 trillion yuan ($261 billion) futures in a single day last month have retreated as fast as they advanced. Trading volumes across the nation’s three biggest exchanges are more than half of what they were at their peak on April 22 and back to levels similar to a year ago, according to data compiled by Bloomberg. The amount of money changing hands on a daily basis has shrunk to $114 billion.”
No doubt, commodity speculation is great again. But with signs the fever is breaking ag-producers of all kinds should be selling rallies as they unfold and not hold out for even higher prices. Especially grain producers.

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About the author

Jerry Welch has been in the futures industry since the late 1970's and is a true veteran of the markets. He has been quoted often in Wall Street Journal and is author of Commodity Insite, one of the longest commodity futures newspaper columns in history. His weekly column has been published each week since the mid 1980's and is one of the most recognized names in the world of commodities.

Mr. Welch is also known widely as a, "so so" flyfisherman.  

His column is published by the Illinois Agri News in La Salle, Illinois, Cattle Today, in Fayette, Alabama as well as Consensus, in Kansas City, Kansas.

He can be contacted at 406.682.5010 for a view of his, "twice a day" market column that includes price forecasts and trading suggestions.

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