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Volatility Increases on Commodities

By February 22, 2013

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There has been a shift in sentiment in the commodities market and it is difficult to tell how long it will last.  Nonetheless, volatility has increased and the markets are on the defensive.

The precious metals began the slide lower.  Gold dropped more than $100 and silver lost more than $2 in just a week.  Copper had one of the worst selloffs I can remember during the last few days.  Crude oil managed to hold up for a while, but it was only a matter of time before it joined the sell list.  Equities also suffered selling in the last couple days.

One of the main reasons for the selloff can be attributed to concerns that the Fed might pullback some of the liquidity this year.  The stock market also had a good run so far this year and was in need of a correction.  We are now seeing liquidation that almost becomes a snowball effect.  Prices will stop when investors see value that is worth the risk of buying in light of heavy liquidation pressure.

This might be a good time to consider using options with futures contracts to offset some of the risk in trades.  You never know how far a market will move under these conditions.  We could see a quick correction in many commodities or it could run deeper.  It is not a bad idea to buy a futures contract at major support levels if you feel a commodity is near a bottom and buy a put option for protection.   You could also sell some out of the money call options against a long futures position, especially since option premiums ticked higher in recent days.

 

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