Global Markets Evolve
Market participants are seeing huge divergence in the global commodity market arena, with precious metals finding violent bids on Thursday, while soft commodities showed limit-up and limit-down type trading in a variety of sectors. The fact that coffee, wheat, cotton, soybean, and sugar, can trade at opposite ends of the buy/sell spectrum, with some going higher at the same time that others go lower, reveals a market that is struggling to find fair value.
The need to create a hedge against US dollar manipulation, in global markets that trade commodities using the US currency as their base, has created an investment-like asset class in commodities, rather than leaning towards their historical norm that use futures contracts to hedge forward commercial commitments.
Commodity markets are used to volatile opens and closes, and very much used to the fact that on some days liquidity will be very thin. Commodities being viewed as more of an investment asset class sets up one two things that is likely to happen. Either commodities take on more of the feel of equity trade, as mid-term valuations become as important as having to trade the ebbs and flows of global economic demand, or all global markets move towards the nuances historically seen in commodity trade.
Thin liquidity, low volume, and a need to roll over or swap positions at the end of each business day, which are all commodity nuances, look to becoming the norm in equity and interest rate trade. The new generation trader is witnessing a seismic shift towards near-term valuations in all global asset classes, with few market makers willing to hold overnight positions. It would seem that near-term valuations and a willingness to move quickly from one asset class to another will dominate the first half of 2011.
Gold and silver, along with hard commodities, continue the pattern of trade that has three or four periods of sideways consolidation followed by one session of heavy upside movement. At the current levels there are no potential signals, either long or short, on any of the main commodity markets. For those without commodity exposure at this time, this is a period in which to sit back and wait for the next main test of support before committing to new positions.