We’ve seen some good moves in a variety of markets in the past few weeks. Gold’s run to new record highs has garnered the most attention, but if you aren’t trading softs, you may not realize these markets have also made some impressive moves. Cotton has surged to its highest level in 15 years. The euro has also seen a bullish move in the last three trading sessions.
Cotton
Traders have seen the rise of many soft commodities in the past year, and cotton is no exception. Cotton futures are up more than 20 percent this year, and are trading at their highest levels since 1995, when prices hit $1.15 per pound. The reasons for the rise are basic supply and demand with a touch of speculation.
Pakistan, a key global grower, has been hit by numerous floods, and China’s crop has deteriorated due to low temperatures and prolonged rains. India has recently imposed a prohibitive tax on cotton exports to protect domestic producers.
Lower yields and fears of a possible shortage have driven prices higher. Storage levels through 2011 are projected to be the lowest in about 14 years. I don’t think we’ll see a shortage, but it’s a possibility.
We’ve also been seeing good growth numbers from China, and its consumers are demanding more cotton. The retail sector has been depleting inventories of cotton during the global recession, and there is talk they will have to bring these levels up and purchase cotton. The U.S., the world’s largest exporter of cotton, may ship 15.5 million bales this year to China, up from 12 million last year, according to estimates from the U.S. Department of Agriculture.
From a technical perspective, cotton had been struggling with resistance near 85 cents a pound for the past 6 months, and this month, it moved right up through that level, fueled by strong technical trading and short sellers’ purchasing back positions. December ICE cotton futures closed Tuesday, September 14, at 94.85 cents.
World cotton production is estimated at 117 million bales this year, while projected consumption is 118.5 million bales. As of now the markets are not questioning the consumption side of the equation but there are concerns over production. If the coming harvest is not great then there could be a shortage.
Even though the fundamentals look bullish for cotton, I think traders should remain somewhat cautious. We saw a similar situation in sugar this year, with nearly identical fundamentals driving prices sharply higher. But then the market quickly snapped, falling from 30 cents a pound in February down to below 14 cents by May. While sugar has been on the rise from those lows, experienced softs traders know these markets can fall twice as fast as they rise. That wisdom applies to cotton as well, and it could be a good time to purchase puts at the current peak. If the buyers unwind their positions, we could see 70 cents again, or even the mid-60s within six months.
Gold
Gold hit a new all-time high on Tuesday, September 14, 2010, rising to $1,276.50 an ounce. I continue to recommend gold as a solid part of an investor’s portfolio. It almost seems limitless. The latest move came amid fears of inflation. Inflation numbers in the U.K. and Switzerland were higher than expected, and when people are worried about inflation, gold is what they want.
However, I would not recommend buying at a record high–wait for pullbacks. A correction to $1,200 or lower would be a better price level to establish a new long position. For those investors that want to get in on the gold market at the $1,200 level but are afraid of missing out completely on the gold run, I suggest that you sell a Gold call with a strike of 1200 to collect premium. We’ve had a big run since the start of August and it’s hard to say how much further it can go but I do believe that we will see above $1,300 before the end of the year.
Euro
The euro moved up versus the U.S. dollar on Monday, September 13, after global banking regulators agreed to impose new rules, including increased capital requirements for lenders. Gains continued Tuesday. The euro rose above $1.29, which the media tied to concerns about U.S. economic weakness. I think the euro’s move was more about getting out of the low yielding U.S. dollar than about improving fundamentals in Europe.
There is also a fear of missing out on other opportunities, including riskier assets. I think the move up in the euro is short-lived, and in the fourth-quarter of 2010 and first quarter 2011, the dollar will significantly strengthen. A move above $1.30 to about $1.32 in the December Euro futures looks to me to be a good shorting opportunity, but I would put a stop above the $1.34 resistance level.
Drew Shaw is a Senior Market Strategist based in Lind-Waldock’s Toront
o office, and is serving clients in Canada. If you would like to learn more about futures trading you can contact him at 877-840-5333, or via email at dshaw@lind-waldock.com.
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