Several weeks ago I wrote about how the US dollar was on the verge of a breakdown and that gold was on a verge of a break out. Sure enough, the dollar has hit multi-year lows against a wide array of currencies and gold, while overbought in the short-term, seems to be well on its way to multi-year highs.
One of the interesting aspects of this recent move up in the gold market is that gold prices have had a relatively orderly move up to new highs. After the knee-jerk sell-off in gold (where gold mindlessly tracked the equities market) gold has moved higher by trading in ranges…and breaking those ranges…and moving swiftly higher due to buy stops being triggered. Another way of looking at this is that gold prices have moved higher in a “stairway” type approach. Take a look, for example, at the gold chart.
I believe that we can expect the same type of trading as we head towards $800. Sell-offs within ranges should be buying opportunities, with previous levels of resistance serving as decent support. In the short-term, I expect a further move that will indeed take us close or above the $700 level, followed by a sell-off.
While the $700 is simply a psychological number, it might prove to be the upper end of this range. There seems to be a good number of shorts in the markets, but there has been strong investor demand for the metal.
Palladium prices also hit a 10 month high this past week. Take a look at the below chart.
Earlier this year I was quoted in Barron’s as saying the palladium prices would likely finish off the year at above $400/ounce. With the price of palladium on a pretty steady uptrend (and now trading at $375), this seems well within reach. Ironically enough, palladium, which is used in automobiles, is like a trusty old car. It often has trouble starting…but when it starts…it moves. For the last 6 months it has traded in a range…but in the last couple of weeks it has clearly broken out of that range.
The move of palladium this week also reminded me of several value plays in the commodity markets. Almost two years ago in August, I wrote my first commentary on palladium. At that time palladium was trading near $180/ounce. The metal had not only failed to move up during this first stage of this precious metals market, but it had actually declined drastically from its highs. In that article, which you can read fully here, I stated the following:
Whenever an asset falls in value by 80%, it has to be examined for its potential as a contrarian, value-oriented investment. Such is the case with palladium. In a commodity bull market, where substantial run- ups have occurred in oil, copper, precious metals, and other raw materials, palladium has escaped the notice of most investors.
Is Sugar The New Palladium?
Sugar is one commodity that I feel is a long-term value buy at this level (with potentially some further downside movement). It has declined by greater than 50% from its highs and I believe that it is now setting up for a steady march up towards new highs. A year ago in January (several weeks before the ethanol craze started with Bush’s State Of The Union Address) I wrote an article titled "Sugar and Corn: The New Oil Of The Future.” At that time I expected corn prices to have a vicious rally and sugar prices to head towards 21.50. Corn prices did indeed have a vicious rally in 2006, but sugar prices did not live up to my forecast.
One of the main reasons corn prices have skyrocketed over the last year has had to do with the increase in ethanol demand. Ironically, sugar-based ethanol is more efficient than corn-based ethanol and more widely used worldwide. Nevertheless, the hype and speculation behind corn-based ethanol in the United States did not occur in sugar. Additionally, there was an increased demand of sugar canes that was planted in Brazil to meet this upcoming ethanol demand as well as record crop supplies from other parts of the world that provided downward pressure on sugar. Another important fundamental factor to note was that China began selling off some of its sugar reserves last year to combat rising sugar prices. I fully expect China to be strong buyers as they not only look to restock their reserves, but also to meet rising demand. Below, you will notice several charts of interests. First, take a look at the dramatic sell-off in the sugar market and its present oversold conditions. Next, I have provided a chart that shows the steady consumption of sugar over the last decades.
Sugar Consumption Demand