Something crazy has been taking place in the commodities space recently, and for traders looking to make money in sector, things are seemingly as confusing as they’ve ever been. Take, for example, the game-changing news from the Federal Reserve and its commitment to buying $40 billion worth of mortgage-backed securities (and even Treasury bonds) for an “unlimited” period. This news, along with the pledge by the European Central Bank (ECB) to buy bonds to keep troubled nations’ sovereign debt yields down, and the latest round of quantitative easing by the Bank of Japan, amounts to a virtual flood of global capital likely to keep pushing hard assets up higher into infinity and beyond.
Yet this week, we’ve also seen a significant plunge in the commodities space. On Monday, commodity prices saw their worse one-day drop in months, with the Deutsche Bank Liquid Commodity Index, Diversified Excess Return sinking about 2.5% in the session. The declines here were led by oil and grains, and even high-flying gold prices fell that day.
Tumultuous commodities prices
Now, some are speculating that the quick drop in commodity prices on Monday, which included a relentless batch of sell orders flooding the market all around 2 p.m., was the result of a huge hedge fund blowing up and needing to liquidate positions and raise capital. Others are saying that the price of oil has dropped because the Saudis are trying to “talk down” the price of Brent Crude to their preferred target of $100 per barrel. Whatever the reason(s), the fact is that a drop in the value of crude oil, natural gas, heating oil and RBOB gasoline, all to the tune of about 2.5%, and the plunge in grains like corn, soybeans and wheat of about 4-5%, has given commodity traders fits.
During times of price tumult, I’ve always found it wise to step back and look at the big picture. The way I see it, nothing fundamental has changed. Central banks are printing money, and they’re going to keep doing so for a long time to come. The global economy is struggling to gain its footing, but that’s a reality the market has already digested. The bottom line here is that the latest move lower in the commodities space looks like a correction that should be bought, and I think the latest pullback represents a great entry point for traders.
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