The big question this article will address is: will the bull market in commodities continue? The answer, in my opinion, is yes. However, I think gains in the commodity markets aren’t as likely to be as broad-based as they were in 2010. I think you’ll have to be a “commodity picker” and be more selective about the markets you trade or invest in. This article is a big-picture blueprint of which markets I feel have the most potential for long-term bullish performance in 2011.
We had a confluence of factors in 2010 that created big bull runs in nearly every exchange-traded commodity. Weather issues impacted the agricultural markets, and these events are impossible to predict. Cotton was up over 90 percent, corn was up 50 percent, and coffee was up 76 percent. Precious metals rose as investors sought safe-havens in hard assets, and oil gained momentum by year-end as the U.S. economy showed signs of improvement and more supplies began to be drawn down.
I think the Federal Reserve’s quantitative easing policy known as “QE2” is coming to an end, and interest rates will begin to move up. At the same time, unemployment should remain a major problem this year. It will take a long time to get back to where we need to be. Analysts speculate that the last quarter of 2011 looks to be the time when the Federal Reserve will end its prolonged easing cycle. Perhaps an interest rate increase will be coming from the Fed early in 2012, and we’ll have a whole new set of factors to consider.
As commodities are priced in U.S. dollars, the dollar’s trend will be a big factor for these markets in 2011. Will the dollar strengthen in anticipation of higher interest rates? Or will concern about the health of the economy keep the dollar depressed? Paying back the sizable U.S. deficit, and how that will be accomplished is another factor to consider this year.
And that’s just the U.S. Europe has its own problems. Every time we heard news of trouble in the Eurozone last year, we saw the U.S. dollar move up and also saw a flight to safe-haven assets like gold. Let’s first look at gold.
Metals
Gold was not the biggest performer on a percentage basis last year, but it was the media darling as investors looked to hard assets to protect their wealth amid economic uncertainty. The price of gold hit a record above $1,400 an ounce, and was up 30 percent in 2010. Unlike the agricultural markets, which have seen up and down years over the past decade, the price of gold has moved up ten years in a row. It hasn’t moved straight up–it has seen some significant corrections—but nonetheless, the bull run in gold has continued for ten years, during economic expansions and contractions.
I think there are compelling reasons to believe gold will post another positive year. Gold isn’t a one-trick pony; there are many reasons investors flock to gold. It is a hard asset that always has value and offers protection in inflationary environments.
Gold has fallen about 4 percent during the first four days of the new year, but I think the decline is mainly tied to profit-taking. This type of move is a normal correction and doesn’t scare me one bit. There are various strategies in the futures and options markets you can pursue to participate in this market, no matter which way it’s headed. If you are bullish, you could buy at current levels if you don’t feel the market will see a major correction. However, I think its possible gold could fall further in the short-term and recommend waiting for a move down to $1,330 or $1,275 to buy.
Silver was up about 80 percent in 2010. However, this is a one-year dance for silver, not a 10-year dance. Silver is still undervalued in relation to gold; it hasn’t yet reached its 1980 peak at near $50 an ounce. While I’m bullish silver, I recommend trading gold over silver to my clients because the volume in gold futures is much better than in silver. You can trade mini or micro-gold futures contracts if the larger contract is out of your reach as a smaller investor, which offers you some flexibility too.
I’m also bullish copper, which posted double-digit gains in 2010. Palladium was up 97 percent, but even so, it looks like supply issues could continue to boost prices. As industrial metals, both copper and palladium should benefit if the U.S. economy improves. Copper is widely used in housing, and palladium in the manufacturing of cars. However, these markets can be very volatile and lightly traded, so you have to use caution; I recommend being underleveraged if you wish to trade these markets.
If the dollar moves up further in 2011, certain commodities won’t be able to withstand the pressure. I think gold can, but it will see corrections of the nature we have seen in early January.
Energy
Crude oil began to really gain momentum toward the end of 2010, and analysts and traders were predicting oil would soon reach $100 a barrel. Currently, front-month NYMEX crude oil is trading near $88.
At this time last year, investors were worried about a “double-dip” recession. Today, it appears the probability of that materializing is pretty low. If the economy is recovering, that means consumers are driving more, and buying more goods, and truckers are shipping those goods in greater amounts. Airline traffic will increase. That means the price of crude oil will rise. I also feel crude is a market that like gold, can weather gains in the U.S. dollar.
Agricultural Markets
Traders will need to be more selective in the agricultural markets in 2011. At this time, my opinion is to shy away from cotton and sugar. I wouldn’t necessarily recommend shorting the market at current levels, but I wouldn’t recommend getting long either. These markets saw sizable moves in 2010 based on unique supply and demand factors, which magnified gains beyond normal trends. These factors may be different in 2011.
Will Mother Nature support bull markets in grains or softs this year? I don’t know for sure. Wait and see if the fundamental or technical picture changes before formulating a strategy in these markets. I think coffee and some of the other softs markets look to be volatile markets you can trade on both sides this year and don’t present an overall bullish case at this time.
I certainly can’t predict the future and my outlook could change as events unfold. However, at this time I believe the bull market will be alive and well in commodities in 2011, but traders will need to be selective. My picks at this time for long-term bullish investors are crude oil, corn, gold and stock index futures. By year end, I think these markets have the greatest likelihood of experiencing year-over-year gains.
Jeff Friedman is a Senior Market Strategist with Lind Plus. He can be reached at 866-231-7811 or via email at jfriedman@lind-waldock.com. You can follow Jeff on Twitter at www.twitter.com/LWJFriedman. Join Jeff for his monthly webinar, Friedman’s Futures Forecast, by visiting Lind-Waldock’s events page at www.lind-waldock.com/events, and hear audio podcasts from Jeff with short-term trading strategies, updated daily, at www.letstalkfutures.com.
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