Today’s investment outlook entry at PIMCO is a great read. Bill Gross, perhaps as much as anyone in the world, has benefited by the incredible performance of fixed income (relative to equities) over the past 30 years. So when he questions the future efficacy of investment in sovereign fixed income–and even mentions the term “hard money“–we listen.
When a gold investor decides to take the leap and “get physical”, the usual first step is the purchase of a gold bullion coin. Many investors in the US, with good reason, are attracted to the American Gold Eagle coin, for its liquidity, convenience, and wide availability. The AGE however is not the only game in town; many other countries’ gold bullion coins approach (and possibly equal or surpass) the popularity of the American Gold Eagle in many parts of the world. [See also: 50 Ways to Invest in Gold.]
While most traders have kept their eyes glued to high profile commodities like gold and crude oil, wheat futures have been on an absolute tear. Three different kinds of wheat futures are up more than 10% in the trailing week, with standard wheat futures gaining roughly 18%. The majority of the crop is used in human consumption, ranging from cereal and bread, to pasta and even beer. Unlike corn, wheat is primarily used as food and doesn’t find its way into biofuels or livestock feed nearly as much as its yellow cousin. As a result, wheat is grown primarily to make a high quality flour for baking bread in countries around the world [see also Invest Like Jim Rogers With These Three Agriculture Stocks].
Commodities are potentially very powerful investments, but they also come with their fair share of risks. In recent years, investors and advisors have begun to adopt commodities into portfolios, as many have seen the benefits of adding these low-correlated assets to a group of holdings. The launch of a robust lineup of exchange-traded products that utilize both physical commodities and commodity futures contracts has brought commodities to the masses; they’re no longer reserved for the largest and most sophisticated investors.
Commodity investing has surged in recent years, as investors have discovered the diversification benefits associated with low-correlated hard asset exposure in their portfolios. But with commodity investing also come the dangers of contango, as a number of traders fall prey to this phenomenon every day. By definition, contango is the process whereby near month futures are cheaper than those expiring further into the future, creating an upward sloping curve for future prices over time. The reason behind this is most often attributed to storage costs; storing barrels of oil or bushels of corn isn’t cheap and the costs have to be passed down the line. Some commodities, like natural gas and crude oil, are known for exhibiting steep contango over time, while others may never show signs of this phenomenon [see more at What Is Contango?].
Commodity trading can be a difficult beast to tame. Those who do choose to trade these highly volatile assets need to be up to date on their information while always keeping a watchful eye on markets. Those who do not closely monitor their positions or do not have a calculated goal with each commodity allocation can often end up on the receiving end of a sour trade. In an effort to help traders make the most educated decisions possible, we break down each major commodity by its technicals in the following table giving traders more insight into the developing trends of your favorite futures contracts. Note that this table is only relevant for the current week of 5/14 – 5/18.
Energy: For the first time in seven trading sessions Crude made a higher high and higher low as prices will close virtually unchanged today. Sales between $96-97 continue to get rejected. I would not rule out a sideways congestion and on a settlement back above $98 I would venture to say increase bullish exposure. For now I would be lightly scaling into longs as long as $96 holds on a closing basis in June. RBOB failed to remain above $3 closing slightly lower today. Next support is seen at $2.97…that level needs to hold in June.
Earlier in the year, it seemed like natural gas was the commodity with little to no hope, as the fossil fuel posted some impressive losing streaks. But it seems that crude oil is hellbent on taking NG’s place, as WTI futures have slid for six consecutive days, making it the longest losing streak for this commodity in nearly two years. But crude’s rather volatile behavior in the past six months can be attributed to a number of macroeconomic factors pushing and pulling the asset in either direction [see also 25 Ways To Invest In Crude Oil].