For 2019, commodities offer a unique investment advantage over traditional investments, considering a slowing global economy and inflation no longer on the horizon. Several commodity markets are poised for well-defined up-trends which are beginning now.
I plan to write about these markets on a bi-weekly basis as the views presented here are more thematic and longer term in nature. Updates to the trading strategies published here will be provided on an ongoing basis.
Inflation is no longer in doubt, global markets are slowing, the US dollar is likely to be devalued in the coming years. This means that certain commodity markets have the potential for sustainable rallies. While these markets can be volatile in the coming years, a few of these commodities should be evaluated as additions to your investment portfolio.
GOLD
My bullish outlook for 2019 is partly due to inflation that is already here and due to the central banks of the world turning dovish in 2019. There should be a revival on individual investor interest as Gold grinds higher into the 1400s by year end. The China tariff situation has risk associated with it in relation to gold prices. This is a short-term issue that should resolve itself in the coming months. A resolution with tariffs may have a short-term negative effect on Gold prices. It will be important to hedge any long to ensure you have your invested capital is protected.
On the weekly chart, the 15-year seasonal trend is higher into February with a target in the 1320 area then a pullback for two months then another seasonal rally into November 2019. While seasonal trends are not reliable in and of themselves, likely with the context we have now with central bank and the slowing economy, they should prove to be productive. Longer term, I am looking for high in 2019 into 1450 and a new high in Gold toward the end of 2021.
On the daily chart, with no current COT data due to the government shutdown, we can only look at the previous report which showed speculative interest at 106,000 contracts. The peak in Gold was over 370,000 contracts by speculators which was in 2016 so we are no where near over bought or over invested on the part of speculators. While I am expecting a peak in metals in early February according to my Hurst cycle work, the lean is gold this year is long until I see speculative interest above 200,000 contracts. When this is seen, then I will consider gold overbought.
Trading Strategy
With the possibility of a trade deal with China, I am expecting volatility in Gold. I am suggesting that any long futures trade be hedged with a put for downside protection. Consider an entry long in April Gold using Futures with a long April 1285 Put for protection and fiance the put by selling a call at 1330. Plan to exit the trade when the futures target is reached between 1320 and 1330. I have no interest in any counter trend trade in Gold this year.
CORN
Any deal with China regarding tariffs could be very bullish for Corn. China is currently running at an annual production deficit in corn and may be in a position to import 3-4 millions tons of US corn in the near future. Stocks are currently low in Corn in the US and when the government shutdown ceases and ending stock revisions are make, we could see current stocks below 1 billion bushels. No one can tell what the USDA will report until we see their publication in early February. Given the current context, this provides a trading opportunity for Corn in 2019.
On the weekly chart, the 15-year seasonal trend is trending up until July, my Hurst cycle work has a rally into at least the early April time frame. The longer term trend down in Corn may have finished in September of 2018.
On a daily basis, the rally into April should take us into the 420 area and we are currently in a triangle with compression which should break to the upside in the short term. Other fundamental factors aside, the technical lean on Corn is bullish this year into April and then again into early 2020.
Trading Strategy
With the uncertainty regarding a trade deal with China, I am suggesting that any long futures trade be hedged with a put for downside protection. Consider an entry long in July Corn using Futures with a long July 3.90 Put for protection and fiance the put by selling a call near target at 4.30. Plan to exit the trade when the futures target is reached at 4.20.
Wrap Up
With China GDP now at the lowest rate of growth in over 28 years, don’t think that the central banks would be making adjustments over the coming months. Volatility is likely to continue well into 2019 and beyond.
Next week, I’ll be covering other key commodities for 2019 which include Coffee and Natural Gas. In the future, I will be reporting on the trading strategies suggested in this report.
Disclaimer: Trading futures contracts and commodity options involves substantial risk of loss, and may not be appropriate for all investors. By reading this report, you acknowledge and accept that all trading decisions are your sole responsibility. Trading strategies referenced in this document are only suggestions, no representation is being made that they will achieve profits or losses. Past performance is no guarantee of future results.
27th Jan 2019