Tom Szabo

Crude Oil and Gold: Not Worth Worrying Over

An alternate theory gaining a bit of credibility compared to "first a slight correction, then to da moon!" is that commodities, oil and gold will trade in a wide consolidation pattern during the next few years. There is no fundamental reason why oil couldn't be trading at $50 today just like there is no fundamental reason that it is trading at $80. Similarly, I think the idea that gold cannot trade for an extended period in a price range of perhaps $700-$1100, but instead must inevitably trade much higher in the short run, is a sign of groupthink. I have a large exposure to precious metals in the form of physical holdings and stocks so I would love for gold to explode in price but at the same time I believe it's important not to drink the market's Kool Aid.

China & Copper: Prepare for Crisis

buyitcheap, many metals have already had a "downward gap" of 60% or more from their peaks--lead, zinc, nickel, uranium. Platinum, palladium and silver are down about 25-40% and may not have much more to go. Gold and copper are down only around 15% each. Gold will catch a crisis bid, copper will not. Copper, along with oil, is a bellwhether for the commodity sector and has been historically very sensitive to shifting market sentiment. Copper is a great short bet even if it has the best fundamentals out of all the metals.

As for ags, where have you been? Corn, wheat, soybeans, rice, OJ, sugar and many others are already down 30-40% and may be on their way to 60% losses before it is all over. The exception seems to be meats which never went up several hundred percent and therefore they probably don't have as much downside.

One way to play an ag correction is put options on DBA, the PowerShares Ag ETF. For some reason, these ETF options seem to have both pretty good volume and fair pricing. For example, you can buy the Jan 09 33 puts for $200. With a DBA target of 26, that's a 250% return. As a side bet in case ags are set to romp once again, the Jan 09 40 call will set you back $100. A recovery to the March and July double tops should get you about a 200% return, more than covering the cost of the put.

China & Copper: Prepare for Crisis

To those who think shorting copper is moronic or that it will never again go to $1.75, tell that to the longs in zinc, lead and nickel, each of which have already crashed 60% or more from their highs. Yeah, but copper is different, even unique. Riiiighttttttttt... 40% of global copper demand is related to construction. Let's see if speculators can pick up that slack in the months ahead. Or what about the single trader who holds most of the LME warrants? How long will he/she continue to do so?

Already the copper miners have made substantial declines from their highs--some even trading near 52 week lows. They should not be so weak if copper prices are going to stay above $3/lb. since that still gives them excellent operating margins.

The way I'm playing the potential decline in copper is with COMEX put options. Hard to buy and not a lot of volume, but relatively cheap and great upside if copper does come down to join the other base metals in the reality camp. I'm also long silver so I'm not worried if a crash in copper does not pan out--I've got both angles covered.