Even though the bull market and supply/demand story is still firmly in place for commodities, expect rocky trading going forward. Many hedge funds have been piling into these trades, driving the prices higher than normal, creating a “price premium”.
So, when funds have to bail out of everything due to margin calls (a la earlier this week) – expect sharp sell offs, fundamentals be damned. These sell offs create nice buying opportunities if you are the “buying on dips” variety. What does that mean going forward in the near term? It’s probably best to use reduced leverage – I learned that the hard way this week myself.
Kevin Kerr on this subject in Agora’s 5 Min. Forecast:
“I am not convinced that the global market is done with the widespread selling,” our resource man Kevin Kerr chimes in. “Many of the commodities will probably lose more value. It’s very hard to say what will happen, because the volatility is so extreme that it’s tough to keep up. It is a very difficult time to trade, and I usually stay on the sidelines until the selling seems to be exhausted.
“When the Fed meets next week, it will likely make yet another dramatic rate cut — maybe another three-quarters of a point, maybe more. However, soon, the interest rate goody bag will be empty, so Mr. Bernanke had better hope it works.
“We are seeing much of the premium disappear from the equity and commodities markets, because hedge funds and investors need to cover margin calls. It becomes a domino effect, and prices can tumble.”