Monday May 13, 2013
Farmers across the Midwest, especially the western part, are hoping the rains will subside for a few weeks. Much of the Midwest has been too wet to plant corn and soybeans so far this season.
The latest crop progress report released on Monday afternoon shows corn and soybeans are far behind their 5-year average. Corn is only 28% planted, compared to 85% for the 5-year average. Soybeans are 6% planted versus 43% for the 5-year average.
Typically, the more delays there are in planting, the lower the yields and total crop size. Farmers can switch corn acres to soy acres if the window for corn closes. That would be somewhat negative for soybeans.
The farmers can make up ground very quickly if the weather clears. They did fairly well for corn in the last week, but they are still well behind. The markets aren't getting too excited so far. That wet weather will have to continue for a couple more weeks to really get traders worried.
For now, the markets are still expecting very large crops for corn and soybeans. I would expect the crops to eventually get in the ground before the window closes and the warm weather could accelerate the growth of the crops. The main test will come in the summer. A lack of drought and extreme heat will probably give us very large crops and put pressure on prices.
Wednesday May 1, 2013
Crude oil lost about $2.50 on Wednesday, as a series of negative news items had traders running for the exits. The market was technically setup for a large move after an inside day was formed on Tuesday. An "inside day" refers to the market trading within the previous day's range. The following day is typically a powerful breakout in either direction.
The negative news started last night when China released weak economic news. The market was also looking forward to the Fed comments. Probably the biggest news came from the weekly oil inventory numbers. They showed a record amount of supplies on hand. Crude oil making a run at $100 again in light 0f the supply numbers might not be warranted.
The market trended lower all day. Support was found just above $90, which is the 50 percent retracement of the rally from the last couple weeks. Crude oil closed right at $91 on the day.
It might be difficult for oil to rally much higher in the next couple months. Traders are worried about the large amount of supplies and the stock market is looking fairly lofty. Stocks have a tendency to rally the day after a Fed report. If that doesn't happen, we could see overall weakness in stocks and oil in the near term. The term "Sell in May and go away" is on the minds of traders.
Monday April 15, 2013
Gold prices are in the midst of a complete meltdown. Gold traded about $144 lower on Monday, which is on the back of a large selloff late last week. Gold is now trading at $1,356 an ounce, down 9 percent on the day. Silver prices were in even worse shape. They lost about 11 percent on the day, ending at $23.36 an ounce.
There has been a lot of talk on why prices are down. The main one centers on the fear that Cyprus will be forced to sell a great deal of their gold holdings and many other struggling European countries may be forced to do the same. Goldman Sachs also recently came out with a bearish call on gold.
Regardless of the catalyst, gold broke major technical support and the market is in severe liquidation mode. Market moves like this tend to be exaggerated and it is likely there will be an overshoot to the downside. I don't like to sound like one of the perpetual gold bulls, but I believe the market will move higher in the long run and much of this is panic technical selling. Many investors and institutions have to liquidate for margin reasons and gold funds like GLD have to liquidate their physical gold positions.
The main thing I look at is the cost of production for gold. I have seen many figures thrown around, but an average cost of production around the world is about $1,300. The large miners are a couple hundred dollars below that figure, but this is an average cost. When commodities break below their cost of production, a low in price is not far behind. Buying gold near or below $1,300 looks very attractive.
I like buying the ETF (GLD) for a long term trade. You could get washed out if you trade futures in this environment and trying to pick a bottom. It is amazing to think that the cost of production has gone from about $300 when the rally began around the turn of the century to where it is now. The same can be said for corn and soybeans. I remember around the same timeframe that farmers could turn a profit with corn in the low 2's. Now, they would be far underwater. Who says there isn't any inflation?
Tuesday April 9, 2013
Natural gas has finally gotten the feel of a bull market. This has been in the making for several years as gas prices have drifted lower into the abyss year after year.
By now, we all know the long term outlook is very positive for natural gas and it makes sense that prices will eventually moves higher. The problem has been the over burden of excess supplies.
Coming into this winter, most analysts were doubtful that much of a chunk of the excess supplies would be taken out of the market. However, the winter was colder than normal and supplies have finally fallen below the 5-year average.
At the very least, I think the tables have turned and we are now in the early stages of a long term bull market. I'm sure we will see some sharp setbacks along the way, but a floor in prices has been established. Natural gas makes sense on so many levels and it will be difficult for demand to not increase in the long run.
It would actually be better if prices didn't move much above $4 for the next couple years. This would provide for long-term planning for natural gas usage that would solidify higher prices 10 years from now.
As the winter comes to an end, natural gas will key on cooling demand as temperatures climb. The focus will also be on production and long term commitments for shipping natural gas abroad. The U.S. has by far a much lower cost for natural gas than other countries. It makes economic sense for us to ship liquified natural gas to these countries and everyone benefits. I think it is only a matter of time before this happens, along with many other industries further adopting natural gas usage.
This probably isn't a market to chase higher. It could reverse from $4 at anytime. The $4.50 level is also a major level of resistance. Patience might be the key for long term investors.