Commodities Down, but Far from Out!

Over the last decade commodity prices have been surging at a breathtaking rate, except perhaps for the end of 2008 and into early 2009, when we saw a significant correction. Even so, the vast majority of investors, around 90 percent, have little or no exposure to commodities and resources at all.

And that’s a big mistake!

You see, the swift correction to the global markets last week was violent and unnerving for scores of investors. It was also overdue, though, especially for many of the commodity markets. Short term these markets looked overextended. But make no mistake … the overall trend is still much higher longer term.

That’s why I believe the real key to ongoing success in trading is to have a short-term and a long-term outlook.

Don’t Be Married to
One Side of the Market

Unfortunately traders will often get wrapped up in the idea that they either have to be permanently bullish or permanently bearish on the resource markets. But that is simply not the case.

As traders we must always look for market opportunities regardless if those positions are bullish or bearish. Remember: We can make money from falling markets just as easily as rising markets. The recent sell off is reminiscent of the liquidation in 2008; back then many “experts” called the end of the bull market for commodities. They were wrong.

Since the 2008 pullback we have seen commodities that most of us use every day rise steadily. Commodities such as gold, coffee, sugar, gasoline, cotton, corn, wheat, lean hogs, and many more.

While the short-term outlook for commodities is fairly bearish, that could change rapidly, and I expect the uptrend to resume with a vengeance.

Let me give you two reasons why …

#1: The Sinking U.S. Dollar

As the Federal Reserve’s new ‘Twist’ program unravels in the coming months, and it becomes clear that it has had little if any positive impact, I think it’s inevitable that the Fed will fire up the printing presses yet again and devalue the U.S. dollar even more.

And that is bound to once again drive commodity prices higher.

#2: Pent Up Global Demand

The slowing manufacturing numbers coming out of China — the top consumer of several major commodities, including oil and most base metals — certainly has put a temporary damper on prices. China’s manufacturing sector was worth approximately 43 percent of GDP at the height of the frenzy, and it likely will take some time to see those levels again.

Many commodities have taken a severe beating and are due to come roaring back.

However, unlike metals and crude oil, many agricultural commodities are trading at substantial discounts as compared with other commodities’ averages in real terms. Markets like cotton, orange juice, corn, wheat and soybeans have been crushed.

So now may be a very good time to look at these commodities, especially agriculture, while prices are low. They won’t stay that way forever!

What to Do …

There are many strategies investors can use in a high-risk trading environment like we are experiencing now. Exchange traded funds (ETFs) is one of the best. With ETFs you can get long a market if you think it’s going higher, or you can go short if you think a market is going lower.

And right now the agriculture markets in my opinion are offering some extremely good buying opportunities at these levels. Take a look at the chart below of a key agricultural ETF, Teucrium Corn Fund (CORN).

CORN is off about 16 percent from the high reached on August 30, 2011.

The underlying holdings of this fund consist of corn futures contracts traded on the Chicago Board of Trade.

Or there is the Path DJ-UBS Agriculture ETN (JJA). This debt security is linked to the Dow Jones-UBS Agriculture Subindex Total Return, a benchmark of seven futures contracts on agricultural commodities traded on U.S. exchanges. Corn futures make up about 16.3 percent of that index.

And there is also one of my favorites, the highly liquid PowerShares DB Agriculture Fund (DBA). DBA follows the Deutsche Bank Liquid Commodity Index Diversified Agriculture Excess Return, a benchmark of futures contracts on some of the most liquid and widely traded agricultural commodities in the world. Corn makes up about 12 percent of DBA; other commodities include soybeans, sugar, and live cattle.

These ETFs are just three examples of how to profit from the growing demand for agriculture and soft commodities as they rapidly recover.

If you would like more, check out our new Global Resource Hunter newsletter. That’s where Sean Brodrick and I bring you specific trading instructions to help you ride the commodity supercycle — an ongoing surge in the price of food, energy, metals and more.

So while a correction to the commodities markets is in motion right now, it won’t last forever, especially in agriculture. Use this time wisely and look for opportunities at every turn.

Yours for resource profits,

Kevin Kerr