Agriculture/Commodities/US$ Relationship
Whenever I write about agriculture, it doesn’t get a lot of interest. I don’t know why. Commodities were in a brutal bear market basically since the massive buying climax in crude oil at $147 in July, 2008. I believed the bear market would be ending in the March(ish) 2016 time frame and it is still my belief – but also, there would be re-testing of those lows later in the year. And some commodities would go to new lows, but as a group the re-tests would be at higher lows. Early in 2016, most people had trend extrapolated the bear market in commodities to last basically forever (basically). There were stories about the digital economy, technology, endless supplies of crude oil, electric cars, endless supplies of agriculture, China collapsing, etc. In other words, we in 2016 are so smart and advanced, that commodity shortages were something which we have conquered. It’s the same thought process which occurs at every major secular low. I heard all kinds of stupid stuff into the massive selling climaxes in the stock market in late 2008 – March 2009. And as many of the old timers can attest to – I don’t believe I’m in that category (yet) – the brutal 19 and 1/2 year bear market in gold into the July 1999 lows (with re-tests in 2001) had even goofier “predictions”. So sentiment towards commodities is very favorable generally. Although the latest rally in base metals, like copper,and crude has me concerned at the moment. But when things get as bearish as they were, sentiment resets very quickly and bullishly. So as far as crude oil, I still believe there will be a re-test of the $26 lows early next year, but at much higher lows. But the crude oil bottoming process/accumulation will generally be slow and deliberate. I’m much more bullish on agriculture, some of the reasons are discussed here. There are several ways to invest in agriculture – this is one way – RJA. And of course, there are numerous ways to invest in metals and in energy – and as always, only by buying into weakness.
There are many theories about the different relationships which supposedly exist between markets. But like everything in markets, those theories are true until they’re not. And even if there is a good deal of truth to some of these relationships, they can be the exact opposite for significant periods of time. But the most dangerous problem with these relationships is they are often wildly “wrong” at the big turning points. Meaning, if you rigidly believe in these relationships, you may completely miss the truly wonderful entry points into markets. To show why it’s very dangerous to assume these relationships are written in stone, please view the following charts. First is a gold chart and second is an S&P chart. From March 2003 until October 2007, gold and the S&P generally rose significantly together. And from March 2009 until May 2011, they also generally rose significantly together. The gold permabulls keep telling me that gold only soars when stocks crash. And this one is my favorite relationship – gold vs. the US$. The $ is at the highest level since March 2003, yet gold has more than tripled during the same time. How many times have we heard gold is just the mirror image of the US$? And my personal favorite, the price of gold isn’t really down, it’s just that the $ is up. But believing this nonsense has cost people a lot of money. And there is a certain financial celebrity Debbie Downer who has made millions (I assume) off of his books, who keeps claiming that horse manure. I’m in this business to generate profits, not to come up with theories. And as such, I am aware of when the market is believing the “theories”, but I’m attempting to anticipate when those theories will break down. Because the relationships can become completely unglued at important turning points. And one of the two markets can bottom (or top) well in advance of the other having its’ own top (or bottom). And currently, I expect to see some big changes coming up in the relationships between gold and the Dollar, gold and Government Bonds, and commodities and the Dollar.
About
Trader Scott has been involved with markets for over twenty years. Initially he was an individual floor trader and member of the Midwest Stock Exchange, which then led to a much better opportunity at the Chicago Board Options Exchange. By his early 30’s, he had become very successful in markets, but a health situation caused him to back away from the grind of being a full time floor trader. During this time away from markets, Scott was completely focused on educating himself about true overall health and natural healing which remains a passion to this day.Scott returned to markets over fifteen years ago where he continues as an independent trader.
'Trader Scott’s Market Blog – Agriculture/Commodities/US$ Relationship – November 22, 2016' have 19 comments
November 22, 2016 @ 6:21 pm Aamer
Hi scott,
First of all thanks for bringing the Agricukture theme to my attention….have been looking into it since I started follwing your blog a few months ago. Have now become convinced re investment thesis…..and will hopefully ride this wave up nest year. Apart from the investment thesis …like the fact that almost no one is talking or investing in the space which is a great sign. I normally tend to be late in trends so am feeling good about this one…..
Re comments on oil….I agree that we may see a better entry level in Jan 2017 period but can you clarify the price target because you say a re test of the 26 level and later talk about higher lows….also oil and USD have been inversely correlated for quite some time now….will this correlation also breakdown like what you are expecting for Gold ?
Finally would be grateful if you could discuss copper also….and possible entry levels. I missed that one….but think that like oil we may see better entry levels in Jan….before a move higher in most commodities in 2017.
Will we see another rally in bonds also in the coming weeks as it seems that we may have ST oversold conditions or is it too late to look for an attractive entry level ?
Thank you as usual for your insights,
Aamer
November 23, 2016 @ 5:24 pm traderscott
For oil, let’s see about a break of $38, that would be helpful in setting things up. Yes, the US$ will be a weight, but just not as much.
Copper was one of the first to bottom in Jan. 2016, and I would expect that general scenario holding. But now we look back to around 2.25 for entry point.
Above 2.40% on the 10 year is the area where we can start looking for a shorter term high to set up. So give it a bit, but remember, it’s only a trade for me at this point.
November 24, 2016 @ 3:42 pm Aamer
Thanks scott. Will be reading your blog for updates as time comes closer….
Looks like you were right on gold and silver etc pity I was too rapid to pull the trigger……hopefully you are right about December being a bottom in gold because otherwise it will be a painful trip for me.
Thanks,
Aamer
November 25, 2016 @ 11:16 am traderscott
There will be a lot of volatility here Aamer, we need to make it our friend, not our adversary.
November 22, 2016 @ 10:15 pm Ying-Fen Chen
Hi, Scott,
I remembered $147 for a barrel of crude very well.
I had my money handed to a well known fund manager years ago. He bought oil related stocks for my account when the price of crude was at $140 a barrel. I questioned him why buying the stocks at near its all time high. And I was told that the barrel of crude will go to $250.
November 23, 2016 @ 10:55 am traderscott
Sounds about right. I’ve heard a lot of those stories.
November 23, 2016 @ 4:05 pm David V.
So much for silver being just another industrial metal :)
Have a great Thanksgiving Scott and everyone.
November 23, 2016 @ 4:57 pm traderscott
Exactly David. Thanks.
November 23, 2016 @ 7:14 pm Jon
Hi Scott, been following you for a while and really appreciate your insight. It’s amazing how you can anticipate these moves (stop runs of obvious support for gold at 1200-1190 pre holiday.. Wow). Gaps filled in most all PM ETF’s and sentiment almost zero so I was a buyer today. Thank you for sharing your knowledge. Happy Thanksgiving!
November 25, 2016 @ 11:34 am traderscott
Thanks Jon. Yes the strong hands have been working their “magic”, against all of the way belated buying since February. People have bought gold into strength for all of the wrong reasons.
November 24, 2016 @ 9:06 am Q
Hey Scott any thoughts on entry points for agriculture related commodities coffee, soya, etc. And also anything gratefully appreciated re platinum, palladium and a further word on copper. Re PMs presume whole class can be viewed in a similar fashion at the moment. And re copper presume probably best sit back after the big rally. Also wondering if any thoughts on BTC. Q
November 25, 2016 @ 11:29 am traderscott
BTC meaning bitcoin I assume. no thoughts Q, I have no position there. I’m using RJA to encompass all agriculture. I have no position in any individual ags. There are ETFs for some of them. As far as entry points, weakness should be bought and it’s better if you can trade off of a support area. Plat. and pall. will be trading with commodities in general and with base and precious metals more specifically. Pall. more base, plat. more precious. but I am avoiding them as individual investments. I don’t understand them. Copper, like several markets, is way over done. You may want to start watching FCX for an entry point early next year.
November 25, 2016 @ 2:19 pm Q
Thanks bro. Q
November 27, 2016 @ 10:22 am James
Scott, Please explain in next weeks blog how the Dollar can be losing purchasing power and yet soaring at the same time without the use of MAJIC ?
November 27, 2016 @ 11:38 am traderscott
a)- Currencies are all relative to each other. b)- markets move based upon supply and demand period. There is tremendous demand for US$s.
November 27, 2016 @ 9:13 pm James
Currencies are not relative to each other they are manipulated by the Central Banks for appearances to the gullible citizenry ! Question about the answer to B. You failed to account for the Dollar supply issue in your answer , has the Dollar supply gone up or down during this Dollar rally ?
November 27, 2016 @ 9:22 pm traderscott
Has the $ gone up in price or not James. All markets are manipulated, no argument there. I’m in this business to make money though. You’re not accounting for the total global supply of $s James. You’re only looking at it from a US centric point of view.
November 28, 2016 @ 11:49 am James
No, That was indeed my question has the total global supply of $s gone up or down as the purchasing power went down ? I’m in this business to make money though, no again your in the business of collecting Electronic Federal Reserve debt notes that masquerade as money !
November 28, 2016 @ 1:00 pm traderscott
Actually James, the profits I have made on my long US$ position over the last several years has increased my own personal purchasing power. Do you understand the difference between markets and theories? I don’t care about the US$ collapse theories. You will get your wish one day James, but be careful what you wish for.