When I wrote my first Hidden Assets five years ago with another firm, I worked with a grain analyst who believed that spreads were for sissies, his words, not mine. I wanted to make that the title of my first edition, but was censored. You see I was mentored by several very successful spread traders who had learned the art in the sixties. Even then it was not a new concept. The first commodity spread was probably put on within minutes after the first net position was taken more than a century ago. Spreading fascinated me not only because it made sense, but because these individuals had a high success ratio. I also learned over time that certain spreads can point to a change in market direction. If you read my last posting which was actually written September 8th but published on the 14th, I warned traders not to buy corn . I gave fundamental reasons why I felt the timing was not right, but what really gave me the first clue and then made me do more research to back up my gut feeling was the corn spreads did not support a bull move. I cannot stress often enough that a storable commodity cannot rally when the spreads are three quarters to full carry, especially when interest rates are such a small part of the equation. It shows a lack of commercial demand. There is no need to lock in near term needs even with the prospect of a tight U.S. supply potential. What is the real issue here – demand and availability of lower priced foreign supply. You only need to look at a December corn chart to see the results after my warning.
The last three days of general volatile commodity markets have enforced my stance of a defensive spread strategy. Example when trading currencies, buy a staple currency that has natural exportable assets against one that has a high debt ratio. Spread charts should help provide timing. When you look at the gold/ platinum spread, I want to point out that I had a campaign trade in the eighties before Europe enforced catalytic converters. I bought platinum $150.00 under the price of gold and took profits at even money. Had I kept rolling it over we would be talking from my yacht, providing I would have been smart enough to take profits at $1200 platinum over the price of gold in 2008. My point here is actually regardless of the price of mining costs, we have seen a history of platinum $250.00 under the price of gold and the extreme high in 2008 of $1200.00 over. By the way, unless the fundamentals have changes dramatically, the cost of production of platinum is roughly $200 over the cost of gold. Was the blow off of this spread a warning of the upcoming global slowdown that followed? I would say so. As of this posting platinum is $82.00 under gold – no bottom yet.
New possibilities –
Buy March Kansas City Wheat, sell March Chicago Wheat near 70 cents KC over. Risk 12 cents. The first objective should be 98 cents Kansas City over Chicago.
For additional in depth analysis call Monika Riley at (312) 264-4352 -or- reach her at mriley@pricegroup.com.
Questions? Ask Monika Riley today at 312-264-4352
