Commodities

Below are the latest numbers on the current registrations with the National Futures Association (NFA).  A person or firm is required to register with the NFA in order to conduct business in the futures markets with the public. 

For those not familiar with the industry terms, an Introducing Broker is basically the term for commodity brokerage firms.  Associates are the personnel or brokers.  A Futures Commission Merchant is a clearing firm that executes trades.

Futures Commission Merchants:  106
Introducing Brokers:  1,362
Commodity Pool Operators:  1,015
Commodity Trading Advisors:  1,024
Exchanges:  8
Associates:  51,353

This commodity Ponzi scheme didn't become mainstream news, but it cost a major clearing firm a couple million dollars.  This was in the form of a fine for failure to supervise and not catch the fraud that was taking place right before their eyes. The clearing firm made nearly $1 million in commissions, but were they really responsible for catching this wrongdoing?

Cotton prices tumbled on Thursday as the USDA crop report estimated supplies of cotton to be at the highest level in history.  This will be the third season where supplies are greater than demand.  As you might expect, it was a limit down day for cotton futures prices as they fell 4 cents on the day.

U.S. officials are estimating cotton prices could fall to 65 cents.  December cotton futures closed at 79.37, which leaves more room to the downside.  It is amazing how things change in a year.  Cotton prices reached a record high last year at 2.27 a pound on fears we would run out of cotton.  Now, we are worried about too much cotton.  This is the circle of life in the world of commodities. 

Soybeans have dropped along with other commodities in the last week, but the market is in a very interesting point right now.  Soybeans are sitting on trendline support and this is an area where many traders would be looking to buy. 

Before you run to your local commodity broker and tell him you need to buy soybeans, there are a few more things you need to consider.  Soybeans typically make a high for the year around June.  The market usually doesn't make new highs after this timeframe. 

Soybeans also had a major run above $15, which is an extreme level.  The market also formed a technical reversal at the beginning of May.  In a runaway bull market in the grains during summers, you can expect several reversals.  However, one of them usually works out great - y0u just don't know which one. 

Those ares everal points to ponder, but the trade here is to buy at trendline support or wait for a confimation on a move higher from the trendline.  You want to stay long if the market holds the trendline support.  Or, you could take a short position if the market breaks trendline support and hope for a major top. 

Silver prices have dropped about $8 in the last couple months and now the market might be ready for another rally.  There has been a lot of talk recently about how quiet the gold market has gotten and that has been the precusor of a sharp move higher throughout the last several years. 

Gold and silver sure have the feel that something is about to happen.   I am a little concerned that so many traders and analysts are talking about how the markets are about to rally due to the calmness and slow move lower.  That wasn't the case so many times before, but more people are catching on to this pattern.

Under condidtions like this, the market will probably have a sharp selloff and destroy all the traders who got in ahead of the anticipated rally.  However, the market could follow the typical trading pattern we've seen in recent years where silver could make a run at $50 and gold could run to $2,000 by the end of the year. 

I happen to like buying in this area, but I would much rather buy silver around $26.  For those looking to get into silver, it is not a bad idea to buy half your investment at $30 and buy the other half if silver does fall to $26. 

Gold and platinum are often the most disired of precious metals for investment purposes, but the often overlooked palladium is another precious metal worth considering.  Palladium is trading at less than half the price of gold and platinum, so investors can game more leverage and invest with less capital. 

Palladium typically moves along with the prices of the other precious metals, so investors can keep the same objectives as investing in gold.  Investors can invest in palladium through futures contracts at the NYMEX or they can buy palladium bars in various ounces.

The Barclay Index of managed futures performance has the average of CTAs showing almost unchaged performance thus far in 2012.  The YTD performance is -0.54 percent through March.  Commodities have been fairly weak in 2012, so this performance is actually very repectable.

Managed futures are able to make money whether commodities move higher or lower.  Having markets that are in strong trends also helps tremendously to most managed futures funds.  Some agriculture markets have been trending strongly, especially soybeans.  The performance is reflected in the sub indices, where agriculture traders are up 2.42 percent through March.

Soybean futures continue their ascent as the front month contract broke above $15 on Friday.  Supplies are very tight for soybeans and news of increased buying from China sent corn and soybean prices higher. 

The price of soybeans might actually be much higher if it wasn't for the excellent weather and start to the growing season this year.  The planting pace is well above the 5-year average for corn and soybeans are also off to a very good start.  The mild winter allowed farmers to get an early start this year and that often increases the chances for a good crop year.

Traders are expecting very good yields this year and these extra supplies will be hitting the market this fall.  That has actually kept the market somewhat in check.  Soybeans have had a big run and the momentum indicators show the market has been in an overbought condition for the last two months.  Soybeans are vulnerable to a correction anytime, but the tight supplies might keep a floor under this market for now.

When you first started to learn about commodities, everyone probably seemed like an expert.  As you learn more about commodities and get some trading under your belt, you tend to recognize there aren't as many experts as you thought.  Once you become a successful trader, you can spot someone full of hot air pretty easily.

Learning how to trade commodities successfully takes at least a year for most people, but it often takes about 3 years for most people.  Most successful traders don't brag about how good they are.  They appoarch trading like it is a business and they play the odds.  They make calculated risks and stay disciplined.  Many have egos, but they are still somewhat humble about their trading. 

On the other side, when you see postings online or hear someone brag about how great of a trader they are, chances are that they might not be as good as they make themself out to be.  They might be having a period of success, but this is a typical sign that they can't handle the success and they more than likely shortly fail. 

A successful trader will focus on the big picture, striving to make a respectable gain at the end of the year.  Unsuccessful traders often swing for the fences and make erratic trades.  They focus on making a trade that will give them a good story to tell their friends. 

More than anything else, it is entertaining to be able to spot frauds in this industry. 

Commodities have lost about 10 percent in the last two months.  Is this a good time to buy or is it the beginning of a much larger decline?

There really is no best time to buy commodities, but buying after a correction is usually a good idea in a major uptrend.  Looking at the bigger picture, commodities have declined about 20 percent since the high on March 2011.  A 20 percent decline in a long term uptrend is worth looking at as a buying point. 

The reason for the decline has a lot to do with the economic slowdown in China and the realization that the US economy has never really gained traction.  Then, you add in the European financial problems and that doesn't really warrant a market setting new record highs. 

A couple major driving factors may still be alive and well.  One includes the continued increase in world demand for commodities.  The writing is on the wall that we have to continue increasing production of commodities or demand will outstrip supply into the future.  The other factor includes the Fed's easy money policy.  Sometimes they try to indicate they will back off, but it looks like they might be in too deep to throw in the towel after trllions have been spent on stimulating the economy. 

Commodities overall are experiencing a period of weakness that could go on for a longer duration.  There is also a possibility that the trend is over.  That is probably only a small posibility, but you can't ignore it.  The logical trade here is to buy on support after a correction and / or wait for the market to turn higher and resume the uptrend.