It’s a world shrouded in deep myths and folklore that include stories of people losing their homes, or having 5,000 bushels of soybeans dumped on their front lawn.

I’m talking about the commodities world, of course.

But despite these tall tales, commodities aren’t necessarily dangerous investments. Not if you know what you’re doing and take adequate precautions. Rather, the “secret society” stuff comes from the belief that the sector is a murky one that many investors simply don’t understand. Just the mere sound of “commodity futures and futures options contracts” was enough to send people running for cover…

However, nothing could be further from the truth when dealing with commodities. And over the past few years, we’ve seen great changes in the financial world that have opened the doors to this “secret society.”

Step Out of Your Comfort Zone… Don’t Be Afraid of Futures & Futures Options

I’ll tell you what I’ve told my friends and acquaintances over the years: Don’t be scared of commodity futures and futures options, they’re essentially little different than stock and stock options. If you know how to trade stocks and stock options, then there’s no difference from futures and futures options.

For example, if you can buy and sell IBM (NYSE: IBM) shares and IBM options, then why can’t you buy and sell sugar futures and sugar options? There is no difference. As long as you have an idea of where an investment (be it IBM or sugar) might move to and its underlying fundamentals, then what is there to be scared about?

Here’s the problem as I see it (based on my 18 years of experience in the commodities sector): Most people just don’t know enough about the underlying fundamentals of commodities – how/why soybeans, cocoa, cotton, or live cattle trade in a certain way. The majority of people know stocks and that’s that. They don’t like change and are fearful to step out of their comfort zone.

But all commodities that are available to trade on various U.S. exchanges are highly regulated. They have strict rules, which are efficient and assure the integrity and safety of your capital.

So if you’re looking to add some great potential gains to your portfolio, then consider what commodities can do for you…

Four Commodities… Four Explosive Moves

Want some examples of how explosive the world of commodities can be? Just look at these moves for oil, natural gas, gold and silver over the past year…

How would you have liked to hop aboard some of those moves?

Oil: When it started rising in 2007 and topped in 2008, it encompassed a staggering $90,000 move if you’d held just one contract. And the freefall that ended last March brought in an unheard of $110,000 for anyone being bearish.

If you’d held 10 contracts during those moves, you could have seen gains of over $1 million! And that’s just one direction. Double it if you went both ways.

Natural Gas: The move up in the summer of 2007 to the top in 2008 encompassed an $85,000 move, while the drop back down to the lows hit just two weeks ago and saw an even larger haul of $110,000. And this was for holding just one measly little contract. Imagine if you had 100 contracts.

Gold: From the gold chart below, you can see the trend higher from 2002. But even if you got onboard as late as 2006, the move could still have netted you $45,000.

Silver: A bullish position taken in 2006 would have scored $60,000 on just one contract. And if you’d hopped on the bear train near the highs in the spring of 2008, you could have pocketed another $65,000 just six months later.

This is some serious money folks.

And the great thing about commodities is that it’s normal for them to cycle from highs to lows and then back again. This gives you opportunities to profit on the way up and the way down. Moreover, it’s in contrast to the stock market, where most moves are biased to the upside.

Now, if you want to profit today…

Three Reasons Why You Should Trade These Four ETFs

Due to the changes that have taken place in the commodities world, regular investors have a chance to take part in the sector without leaving the comfort of a stockbroker.

We’re talking about commodity-related exchange-traded-funds (ETFs), which mimic the moves of the underlying asset. So you can use them to play some of the most popular and active commodity markets.

For example, if you’d like to go for oil, natural gas, gold, and silver, consider these ETFs:

• Oil: United States Oil Fund (NYSE: USO)
• Natural Gas: United States Natural Gas Fund (NYSE: UNG)
• Gold: SPDR Gold Shares (NYSE: GLD)
• Silver: iShares Silver Trust (NYSE: SLV)

If you want to gain exposure to the often lucrative commodities world, here’s why you should trade these ETFs…

1. Simple: ETFs trade like stocks, so you can buy and sell them as you would with shares of any other company from a regular stock brokerage account. So you don’t even need to get involved with commodity brokers, futures, or futures options contracts.
2. Options: The ETFs also have options available, which offers you more leverage and can reduce your risk.
3. Liquidity: Because all four of these ETFs are the largest ones available for their respective commodities, there is enough volume to be able to get in and out quickly and safely.

Next time, I’ll show you one of my favorite ways to use an options strategy to execute a bullish commodity trade. But in the meantime, check out those ETFs above.

Good trading,

Lee Lowell

Source: Four Easy Ways to Trade the World’s Top Commodities

It all started back in 1991, when J. Aron & Co., Goldman’s commodities-trading division, recommended that a large institutional client invest about $100 million in commodities.  The vehicle “du-jour” was Goldman’s own investment vehicle, the Goldman Sachs Commodity Index (now the S&P GSCI Commodity Index).

The GSCI is a 24-commodity dollar-weighted index, comprised of 70% energy (oil and natural gas), 8% industrial metals (aluminum, copper, lead, nickel and zinc), 3% precious metals (gold and silver), 14% agriculture (wheat, corn, soybeans, cotton, sugar, coffee and cocoa) and 4% livestock (cattle and hogs).

Goldman was to take the other side of the bet, meaning that should the index rise, Goldman would have to pay equivalent returns to the investor.  In order to hedge, J. Aron needed to institute similar positions in the futures markets for those commodities.

But the plan had one wrinkle in it.  At the time, the U.S. Commodity Futures Trading Commission (CFTC) – the agency that regulated the commodities sector – placed position limits on certain agricultural commodities, like wheat, corn and soybeans.  Other commodities weren’t subject to these same limits.  Yet it was necessary to hedge all the commodities concerned in order for this investment arrangement to work.

So with a large chunk of new business at stake, J. Aron asked the CFTC to grant it an exemption.  Goldman contended that it was not a speculator, but was instead a true “hedger.”

The upshot: In October 1991, J. Aron was granted the sought-after exemption.

Inspired by J. Aron’s success, other members of the commodities-trading oligopoly followed suit, and soon had similar exemptions in hand.

The Global Commodities Boom

In the 18 years that followed the exemption grants, the commodities sector was all in all a pretty orderly place. Between 1990 and 2002, in fact, commodities prices essentially traded sideways.

Unfortunately, that stability wasn’t to last. Like a greyhound that sets out after the hare after having been penned up for too long a stretch, commodity prices started to surge – and ended up doubling over the next six years, albeit in a relatively orderly fashion.

Finally, last year, a market that had been simmering for far too long finally came to a full-fledge boil – and last summer boiled over. Food prices soared, intensifying inflationary fears here in the United States while prompting the leader of the United Nation’s World Food Programme to warn that a “silent tsunami” of hunger was threatening to span the globe.

It seems, though, that the actual boiling point was reached last summer when oil went into a near-vertical climb, surging 63% in just five months, and hitting an all-time high of $147 a barrel last July. Given that oil is in many ways the most relevant commodity to the general public (think fuel for transportation and heating), the new record price touched off a media feeding and prompted projections that crude oil could be headed for $500 a barrel.

As commodity prices were shooting skyward, however, U.S. stock prices saw their already-steep descent turn into a nearly vertical plunge – thank to a worsening of the deepest financial crisis since the Great Depression.

As a result of that crisis, the world’s largest banks, insurance firms and brokerages have been forced to take nearly $1.5 trillion in writedowns, Bloomberg News reported. Because of that and some other related problems, U.S. Treasury Secretary Timothy F. Geithner is pressing Congress to somehow restrain the $600 trillion worldwide derivatives market.

And that has set the stage for a showdown that pits the regulators against the speculators.

What Gensler Wants …

As the spotlight has increasingly been focused on Goldman in the last couple of years for its trading prowess, it’s been suggested on many occasions that the investment bank must be benefiting from some sort of a “special” relationship with the federal government.

The suggestion is understandable on several levels.

Only a month ago, for instance, when Goldman reported its financial results for the second quarter, the investment bank’s trading results helped it record all-time-record profits of $3.44 billion – a good 50% above what experts had been forecasting for what had been expected to be a “blowout” quarter for Goldman.

The stunning profit results once again reminded observers that Goldman Sachs alumnae seem to have a “knack” for landing in positions of high influence.
Former U.S. Treasury Secretary Henry M. “Hank” Paulson Jr., who held that position under former U.S. President George W. Bush – where he was widely viewed as the mastermind behind many of the bank bailout programs conceived last fall – was once the chairman and CEO of Goldman Sachs.

While he was serving as Treasury secretary, Paulson’s office calendar says he called Goldman Sachs Chairman Lloyd C. Blankfein roughly 24 times the week that the federal government opted to bailout out busted insurance giant American International Group Inc. (NYSE: AIG). Remember, had AIG been allowed to collapse, Goldman would have been left holding the biggest of all bags, because of the oversized bets they’d made on AIG’s financial insurance.  Paulson, it seems, would have none of that.

The “Six Degrees of Goldman Sachs” doesn’t end there, either, as the many connections show. Geithner, the current Treasury secretary, was mentored by Goldman alumnus John Thain [the last chairman and CEO of Merrill Lynch before it merged with Bank of America Corp. (NYSE: BAC)].  Plus, Geithner just chose Mark Patterson, formerly a lobbyist for Goldman, as his top aide.

And don’t forget about Gary Gensler, the newly installed head of the CFTC whose resume includes a 20-year stint at Goldman Sachs. But interestingly – perhaps even ironically – Gensler’s new job pits him directly against Goldman, as the CFTC looks to rein in what some consider to excessive speculation.

During hearings held in July and August, attended by representatives from both Goldman Sachs and JPMorgan Chase & Co. (NYSE: JPM), Gensler commented that the CFTC “must seriously consider setting strict position limits in the energy market.” He also indicated that his staff had been instructed to determine “every authority available to the agency” to guard the interests of the public as well as the markets.

What Goldman Should Get

In its defense, Goldman has argued that setting position limits on trading commodities is likely to prove harmful, as restricting access could affect liquidity.  (Highly liquid markets, or “deep” markets with large volume, are considered to be more fairly priced).

Steven Strongin, a managing director at Goldman, recently told a Senate hearing committee that “attempts to regulate volatility have rarely – if ever – succeeded.  Yet they often have unintended and significant consequences.”

Although commodities trading accounts for a considerable part of Goldman’s revenue – some estimates place it at about 8% to 9% – making it a target for would-be reformers, Strongin’s cautionary words should serve as a warning to back off for one simple reason.

He’s right.

Because of the exemption granted to the trading houses, institutional investors have been better able to provide commodity diversification to their portfolios, thereby minimizing some asset and inflation risks.
United States Oil Fund LP (NYSE: USO) and the United States Natural Gas Fund LP (NYSE: UNG) – two ETFs that are among the largest such products in the world.

Though very popular, such exchange-traded funds (ETFs) as the United States Oil Fund LP (NYSE: USO) and the United States Natural Gas Fund LP (NYSE: UNG) could also be affected.  They currently boast large volumes in the 12 million and 40 million units traded/day, respectively. That means that a limitation on futures positions – let alone an outright prohibition – would work against the best interests of individual investors.

Even producers and refiners of petroleum products could end up being squeezed, as well. These oil-sector players sometimes hedge risks by calling on the large commodities traders who can provide them with custom trades on demand.  The dealer then turns around and wisely hedges its own risk.  Now, doubt is being cast on the ability to perform these transactions.
So we know that Goldman, along with JPMorgan Chase) and others – as the largest owners of derivatives – have a lot to defend.
But there’s actually an even-bigger-picture view that argues against regulation – of any kind.

Who Needs Rules?

Government oversight, intervention, and insurance schemes usually lead to problems – often really big problems.

A simple example should be enough to make my point.

Just think back to what happened last year to mortgage giants Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE).  It doesn’t take an accounting degree to figure out that, by having their loans government guaranteed, management had no incentive to follow cautious lending practices.

After all, why should they?  When a base salary is certain, a bonus is tied to sales or growth, and there are no consequences for bad results, why not take on more risk and just shoot for the moon?  If you hit it out of the park, your bonus swells.  If you strike out – even so badly that you even make “Mighty Casey” look like Henry Aaron – and you lose really badly and your company loses big, even to the point of bankruptcy or outright collapse, you still get your base salary.

Where’s the incentive to manage your risks?

In the case of a bank, there’s no incentive to be careful with depositor assets when the Federal Deposit Insurance Corp. (FDIC) is your bottomless backstop.

Clearly, the government does not always know better.

And that brings us back to Goldman Sachs.

Goldman Sachs: Unplugged, Unfettered, Unregulated

In the debate about regulating the commodities markets, I come down on the side of Goldman, reasoning that a free market – left unfettered – knows best, since the forces of supply and demand will ultimately price things fairly.

Inside an economic system as highly developed as that of the United States, everything operates at a level of complexity that no single person – let alone a government bureaucracy – can operate, or even fine tune. And as soon as anyone begins to tinker with it, there are always going to be unintended consequences.  Which leads us back to the question of regulation.

According to Prof. Kent Moors, a noted global oil consultant, only a small portion of a commodity’s price, at any given point in time, can be attributed to speculators.  He believes that speculators they are necessary to provide liquidity and that, in the end, the benefits speculators provide cancel out any of the negatives often ascribed to their marketplace activities.

If regulations with real “teeth” – in this case, position limits on energy futures – are actually put in place, U.S. financial leaders will end up playing the economic equivalent of Whac-A-Mole – an unwinnable game, and a dangerous one, at that.

While the final result is difficult – if not impossible – to picture, here’s my best guess: The financially lucrative, economically prestigious and strategically important commodities-trading business won’t fold up and disappear – it will just move to another country, where it’s better treated, and even nurtured.
Perhaps it will end up in Asia, as has been the case with so many other important businesses during the past couple of decades.  And that, once again, will end up costing America jobs – these jobs high-paying and prestigious – at the worst possible juncture.

According to commodities guru Jim Rogers – who is frequently quoted here in Money Morning – “the three commodity exchanges in China are booming.  Dalian trades more soybean contracts than Chicago does already, and that’s with a blocked currency [and] a closed market.  Can you imagine what’s going to happen if and when they open that market up to foreigners?  It’s going to explode.”

So as you think about “big bad trading firms” such as Goldman Sachs, and commodities speculators, remember the necessary role they play.  And realize that restrictive regulations will end up being bad for consumers, investors, and the same free markets we should be defending.

Source: How Over-Regulating Goldman Sachs Will Lead to Higher Oil and Commodity Prices

Source: Investment News Briefs Thursday, August 13, 2009

As we’ve mentioned before, these products are heavily dependent on the weather for their yield. So if erratic weather patterns affect the crops’ growing cycles, it’s very likely that their prices will rise.

These products aren’t just consumables either. The farmers and food/drink companies that are front-and-center of their production use these markets for income production, too. They do this by using commodity futures and options contracts as hedging mechanisms.

So let’s hit the grains market first…

How To Play The Grain Market Upside With Commodity Futures

A few weeks ago, we keyed in on corn and wheat, stating: “Most of the speculators who play these markets are bullish in nature, so a majority of them are placing bullish bets, either in the form of outright long futures contracts or long call option contracts.

“Right now might be one of the best times to get into the grain markets on the long side because not only are we right smack in the middle of summer, but the prices of corn and wheat have just undergone a five-week massacre to the downside.”

Both commodities markets are still meandering around their lows, which offers another good opportunity to get in on a speculative bullish move. Here’s how to do it…

Take a look at the daily charts below for the corn and wheat December 2009 futures contracts.

If you believe in the seasonality of bullish moves for the grains, and are willing to take a speculative bet, now is a good time to consider a trade.

Your best bet is to hit the futures options contracts that trade on the floor of the Chicago Board Of Trade (CBOT). But make sure you do so in a way that gives you limited risk and unlimited reward possibilities.

For example, that could include entering a call option spread or just buying call options.

For call options, look to play the December 2009 or March 2010 options expirations, which will give enough time for any major weather scares to produce a good upside run.

• Corn: Specifically, consider December 2009 & March 2010 call options with strike price levels from $3.50 and higher.
• Wheat: Use the December 2009 and March 2010 call options that have strike prices between $5.60 and $5.80, or higher.

You can also trade these contracts through the Chicago Mercantile Exchange’s electronic platform, where you can bypass the brokers in the option pits. These contracts are exactly the same as the other, so you can trade them whichever way works best for you.

The Orange Juice Markets – A Hot Spot For Speculators

Having last broken down the orange juice market one month ago, this market has become a hot spot for speculators, as hurricane season got underway.

At the time, the market had carved out a low and we mentioned that it was shaping up for a “potentially lucrative seasonal trade.”

It certainly didn’t disappoint. Over a two-week period, orange juice futures launched higher to the tune of 2700 points. Usually, a move like that will take a good portion of the summer to develop, but with the oversold conditions that existed, it was stronger and quicker than normal.

This served all call option buyers well – especially those who took our advice to buy the January 2010 $85 cent call options. At the time, these options were available to buy for roughly 900 points or lower. And with the 2700-point surge, they tripled in price, fetching prices of over 3000 points.

So what now?

At this point, we wouldn’t advise buying these options anymore. The feverish move has already happened now and OJ prices are beginning to fall back. This is usually a one-time event every year, and unless orange juice drops back down into the low 80-cent area quickly (based on the January 2010 futures), we don’t recommend buying calls at this time. Markets move fast and timing is very crucial.

Let’s take a quick look at our other favorite “weather-prone” commodity – natural gas…

Commodity Futures – Waiting on a Natural Gas Bull

We’ve been bullish on natural gas for a while now, as it slinks along the lows it’s carved out since it reached manic highs last summer (along with many other commodities).

Natural gas will eventually hit a bottom, as it’s an in-demand natural resource that will be around for a long time. We just have to wait patiently for the turnaround, as the market grapples with high underground storage supplies.

Like with the orange juice market, though, we know hurricanes can cause huge upside moves, as the majority of drilling rigs are centered in the Gulf of Mexico. If a few storms go rumbling through that area, it could be the impetus that eventually brings this commodity out of the doldrums. But until then, we’ll bide our time.

One of the ways we’re playing this market in my Instant Money Trader (IMT) service is by selling out-of-the-money naked put option contracts on the natural gas exchange-traded fund -United States Natural Gas (NYSE: UNG).

This ETF tracks the movements of natural gas futures contracts, giving investors a lower cost way to enter this market.

And by selling put options, it allows us to collect the option premium, while having an opportunity to buy natural gas at unbelievably low historical levels. Check out this article for more information on how to sell put options.

Source: Commodity Futures: Playing The Grains & Orange Juice Markets

I’d like to focus this week’s segment on the markets that typically see heightened activity during the summer months, due to the fact that it’s their prime growing season. Specifically, that means the grains and orange juice markets.

As we’ve mentioned before, these products are heavily dependent on the weather for their yield. So if erratic weather patterns affect the crops’ growing cycles, it’s very likely that their prices will rise.

These products aren’t just consumables either. The farmers and food/drink companies that are front-and-center of their production use these markets for income production, too. They do this by using commodity futures and options contracts as hedging mechanisms.

So let’s hit the grains market first…

Bull-Hunting In The Corn And Wheat Markets

In the last issue, we keyed in on corn and wheat, stating: “Most of the speculators who play these markets are bullish in nature, so a majority of them are placing bullish bets, either in the form of outright long futures contracts or long call option contracts.

“Right now might be one of the best times to get into the grain markets on the long side because not only are we right smack in the middle of summer, but the prices of corn and wheat have just undergone a five-week massacre to the downside.”

Both markets are still meandering around their lows, which offers another good opportunity to get in on a speculative bullish move. Here’s how to do it…

How To Play Grain Market Upside

Take a look at the daily charts below for the corn and wheat December 2009 futures contracts.

If you believe in the seasonality of bullish moves for the grains, and are willing to take a speculative bet, now is a good time to consider a trade.

Your best bet is to hit the futures options contracts that trade on the floor of the Chicago Board Of Trade (CBOT). But make sure you do so in a way that gives you limited risk (through call option spreads, for example) and unlimited reward possibilities (through outright call options).

For call options, look to play the December 2009 or March 2010 options expirations, which will give enough time for any major weather scares to produce a good upside run.

Corn: Specifically, consider December 2009 & March 2010 call options with strike price levels from $3.50 and higher.

Wheat: Use the December 2009 and March 2010 call options that have strike prices between $5.60 and $5.80, or higher.

You can also trade these contracts through the Chicago Mercantile Exchange’s electronic platform, where you can bypass the brokers in the option pits. These contracts are exactly the same as the other, so you can trade them whichever way works best for you.

Juicing In July

Having last broken down the orange juice market one month ago, this market has become a hot spot for speculators, as hurricane season got underway.

At the time, the market had carved out a low and we mentioned that it was shaping up for a “potentially lucrative seasonal trade.”

It certainly didn’t disappoint. Over a two-week period, orange juice futures launched higher to the tune of 2700 points. Usually, a move like that will take a good portion of the summer to develop, but with the oversold conditions that existed, it was stronger and quicker than normal.

This served all call option buyers well – especially those who took our advice to buy the January 2010 $85 cent call options. At the time, these options were available to buy for roughly 900 points or lower. And with the 2700-point surge, they tripled in price, fetching prices of over 3000 points.

So what now?

At this point, we wouldn’t advise buying these options anymore. The feverish move has already happened now and OJ prices are beginning to fall back. This is usually a one-time event every year, and unless orange juice drops back down into the low 80-cent area quickly (based on the January 2010 futures), we don’t recommend buying calls at this time. Markets move fast and timing is very crucial.

Lastly, we’ll take a quick look at our other favorite “weather-prone” commodity – natural gas…

Natural Gas Needs A Hurricane-Induced Boost

We’ve been bullish on natural gas for a while now, as it slinks along the lows it’s carved out since it reached manic highs last summer (along with many other commodities).

Natural gas will eventually hit a bottom, as it’s an in-demand natural resource that will be around for a long time. We just have to wait patiently for the turnaround, as the market grapples with high underground storage supplies.

Like with the orange juice market, though, we know hurricanes can cause huge upside moves, as the majority of drilling rigs are centered in the Gulf of Mexico. If a few storms go rumbling through that area, it could be the impetus that eventually brings this commodity out of the doldrums. But until then, we’ll bide our time.

One of the ways we’re playing this market in my Instant Money Trader (IMT) service is by selling out-of-the-money naked put option contracts on the natural gas exchange-traded fund - United States Natural Gas(NYSE: UNG).

This ETF tracks the movements of natural gas futures contracts, giving investors a lower cost way to enter this market.

And by selling put options, it allows us to collect the option premium, while having an opportunity to buy natural gas at unbelievably low historical levels. Check out this article for more information on how to sell put options.And to get on board with IMT, just visit this link.

Source: Grain Hunting: How To Cash In On  The Corn And Wheat Markets

As I’ve mentioned in recent issues, oil had near-term targets of $70 in its sights. It hasn’t disappointed, shooting past the $73 mark late last week – a level not seen since the first week of November 2008.

On a technical basis, because oil has not only moved above, but also stayed above all the major moving averages (including the all-important 200-day average), it’s now got $80 in its sights. If any pullback is going to occur, which should happen after solid runs like this, the move down should hold at the $65 per barrel range.

On a fundamental note, we’ve got three reasons for the recent price rise…

1. Hedge funds seem to be pumping more money into the market again.
2. OPEC has decreased oil supply levels.
3. There seems to be some consensus that oil demand might be picking up from the slack levels seen over the past six months.

For now, the market looks strong and any pullbacks should be met with more buying. Here’s how you can play it…

How To Play Oil With Minimum Fuss

The chart below shows the daily movements of the front-month futures contract (July)…

The easiest way to play the broad oil market (either to the upside or downside) is to go for the very popular and highly liquid exchange traded fund, United States Oil (NYSE: USO). The fund mimics the moves of crude oil futures that trade on the NYMEX.

You can trade USO like a normal stock in a regular stock brokerage account and the ETF has options contracts available, too.

Since we first went bullish on oil, USO traded around $32. It’s now around $38.80 and is a very effective “cheaper” alternative to the high-priced arena of futures and futures options, while still profiting from the same moves as the underlying oil market.

Natural Gas Making Unnatural Moves

Having been stuck in the doldrums for ages, the natural gas market has really woken up recently.

Prices have coiled into a narrow trading range over the past two weeks, with volatile swings of 300-400 points over just a few days becoming the norm. At the moment, it looks like the $3.50 per MMB/tu level is the floor, while the market tries to decide which way it eventually wants to go.

Keep Tabs On The 20-Day Moving Average For Clues To The Next Move

With natural gas prices still sitting near multi-year lows, we continue to have a bullish longer-term perspective.

Also, I’ll reiterate a technical observation from my last issue: Because the 20-day moving average has crossed above the 50-day moving average for the first time since July 2008, this usually leads to a change in direction.

However, as volatile as natural gas is, the 20-day MA is flirting with crossing back underneath the 50-day MA, unless natural gas can muster a convincing move above the $4.000 per MMB/tu level.

We still like natural gas on the long side, but be patient here. This is a real, in-demand natural resource commodity, so it never has the worry factor of going out of business or bankrupt.

You can participate in this market by using the equivalent ETF for natural gas - United States Natural Gas(NYSE: UNG), which reacts just like the futures and futures options do. If you’re considering bullish strategies, UNG offers options contracts as well.

When Inflation Hits, You Want To Be Invested Here

The financials markets and investing can be a highly divisive subject… but most people agree on one thing:

Interest rates and inflation will rise eventually (in fact, rates have already started to rise), while the U.S. dollar will fall. This will be in response to the huge debt that the American government is getting itself into, due to the financial crisis and bailout programs.

Scenarios like this have always led to bullish moves into commodities, as they can buffer the effects just mentioned above. Witness the bullish moves in virtually every commodity sector that began in earnest a few months ago.

One of the best places to be in order to protect yourself from inflation is the metals markets. In fact, gold and silver have fared exceptionally well since the end of 2008 – and haven’t looked back since.

Our technical levels have served us well, allowing us to spot the support areas for both metals – gold near the $880 per ounce level, while solid support for silver comes in at $12.000 per ounce. Both have bounced from those areas and have enjoyed strong moves.

Although both metals are currently seeing slight pullbacks, they should resume their upward marches toward $1,000 and $20 for gold and silver respectively.

You can trade gold and silver directly through the futures options that trade on the NYMEX. Or if you prefer regular stock and options-based plays, check out their respective ETFs – the SPDR Gold Shares (NYSE: GLD) and iShares Silver Trust (NYSE: SLV).

Source:Three Reasons Why Oil Prices Are Rising… And Where They’re Headed Next

The problem I have with this dogmatic definition of a bear market rally is the following: Assuming (and this isn’t a forecast, since I really haven’t the foggiest idea where stock markets will be in six or 12 months’ time) the S&P 500 moved up to 1350 and then declined to 500, as an investor should you care if the move to 1350 — a 100% gain! — was a bear market rally?

My impression is that investors’ fixation on the recent rally being a bear market rally has actually kept most investors on the sidelines and hoarding cash. Now, put yourself in the shoes of a fund manager who, in the last 18 months, has lost 50% of his clients’ money and missed the recent rally (34% for the S&P 500). What is he likely to do? I would think that he would be inclined to purchase equities as they correct the sharp advance since early March, especially as the economic news in the near term becomes less negative.

Based on our conversations with numerous managers in recent weeks, we believe that most quantitative managers’ portfolios were not positioned in expectation of a rally. Of the nearly 80 managers we have talked to, only one manager said they were up since March 9th and the clear majority admitted to being notably down or stopped out on their positions. These managers were both long-only and long-short quant managers using market neutral and non-market neutral strategies, sector neutral and non-sector neutral strategies, longer term and intermediate-term holding periods. It is fair to say that just about everyone is bewildered and trying to understand when this rally will end.

Another factor to consider is that there has been a significant improvement in the technical position of world stock markets. In the US the largest number of new 12-month lows was reached in October. At the November 21 low at 741 for the S&P 500, the number of new lows had already contracted, and even more so at the index’s March 6 low at 666. Also, market breadth and the number of stocks moving above their 200-day moving averages have taken a decisive turn for the better, indicating that the stock market advance is broadening and that the number of stocks that have bottomed out (at least in the intermediate turn) is expanding.

I have explained repeatedly in the past that if a government is really determined to try and postpone an inevitable collapse by “printing money” in order to lift or support asset prices, it can be done. However, the result of such a monetary policy is to lower the purchasing power of its paper currency, with catastrophic long-term consequences for its economic and financial volatility.

It forces individuals and institutions with cash to buy something…anything. So, this cash is channeled into gold and/or different paper currencies, commodities, equities, bonds, real estate, and consumer goods and services, but obviously with different intensities and at different times. For instance, at some times, such as in 2008, more money will be allocated to gold; while at other times, such as since early March, more money will flow into equities and industrial commodities. It is well understood that these money flows are driven largely by speculative activity (and more than a little dose of manipulation). The result in all asset markets is very high volatility and price fluctuations that don’t appear to make any sense to most market participants and observers who don’t understand the new rules of the investment game that were brought about by “money printing”.

This is where we are today, irrespective of whether or not you and I like policies of “quantitative easing, massive bailouts, and frightening fiscal deficits” and their long-term consequences! Another positive factor for stock markets is that a large number of Asian stock markets and individual stocks in the region had already bottomed out in October and November of 2008 and didn’t confirm the new low in the S&P in early March.

In Asia, the Taiwan and Shanghai indexes, and Korea’s Kospi Index, are all up by more than 50% from their late October 2008 lows. (The Shenzhen Index is up 90%.) But it is not only the Asian equity markets that have outperformed the US and Western European markets over the last few months; since late January 2009, the RTS Russian Index is up 66% and the MSCI Emerging Market ETF is up by 55% from its early November 2008 low.

This is not to say that the global economy is about to embark on a strong and sustainable growth phase. It also doesn’t mean that a new bull market in global equities à la 1982– 2000 has begun. But I think that, at least in nominal terms (inflation-adjusted), the global printing presses being run by the world’s central banks and fiscal deficits have begun to impact asset prices positively. Therefore, in the case of resource and mining stocks, as well as Asian equities (and, for that matter, most emerging and other stock markets around the globe), the lows thatwere reached between October and March of this year are likely to hold — that is, for now.

The markets that have the highest probability of having made major longer-term lows are resource-related equities, emerging markets, and Japan. Conversely, the asset market that has the highest probability of having made a secular high (such as Japan in 1989, or the Nasdaq in March 2000) is the US long-term government bond market.

Despite a still-weakening economy and massive quantitative easing, long-term bond yields appear to be on the verge of breaking out on the upside. I have listed again below all the equity recommendations I have made since December 2008. Some of these equities have already moved up substantially (resource and mining companies, in particular) and, therefore, I would only buy most of these recommendations on a correction.

In addition, a number of BRIC and other (mostly emerging market) closed-end country funds and ETS were recommended, such as Brazil ETF (EWZ), the Templeton Russia Fund (TRF), the Greater China Fund (GCH), the Asia Pacific Fund (APB), Taiwan iShares (EWT), the Japanese ETF (EWJ), the Japan Smaller Capitalization Fund (JOF), the Morgan Stanley India Fund (IIF), the Turkish Fund (TKF), and the MSCI Emerging Market ETF (EEM).

In the US, late last year we recommended buying the iShares iBox Investment Grade Corporate Bond (LQD) and Nicholas Applegate Convertible & Income Fund (NCV), while earlier this year we recommended the accumulation of stocks of high-tech companies such as Cisco (CSCO), Intel (INTL), Oracle (ORCL), and Yahoo (YHOO). More recently, we recommended beaten-down insurance companies and financials as rebound candidates, including Leucadia National (LUK) and CNA Financial (CNA), Citigroup (C), the BKX, the Financial Bull 3x Shares (FAS), and the Financials Select Sector SPDR.

The market’s advance had been broadening and that more and more groups such as airlines (AMR), homebuilders (TOL, CTX, HOV), and cyclicals such as Dow Chemical (DOW), International Paper (IP), and Alcoa (AA) are showing signs of having bottomed out. Among commodities, I am particularly intrigued by natural gas. There are natural gas ETFs (UNG, GAZ), but costs are high. A better way is probably just to buy future contracts, or Pioneer Natural Resources (PXD) or the First Trust ISE Revere Natural Gas Index Fund (FCG).

Source: What to Buy…or Not Buy

So much for history.

It makes more sense to focus on the present – and that means taking what the market gives us. With commodities, that’s a hearty dose of volatility…

Another Chance To Go Long On Natural Gas

The natural gas market giveth and then taketh away.

We’ve been bullish on the natural gas market since the price hit a long-term support level near the $4.500 per MMbtu mark a few months back. Since making a new low price of $3.740 (based on the May 2009 futures contract) on March 18, the futures blasted higher by 1,000 ticks and reached a high of $4.750.

But with a surprise Energy Information Administration report last Thursday, which showed a much larger buildup of underground natural gas supplies, the market has sunk right back to its lows of $3.750 per MMBtu.

Although we’re a little disappointed with the current state of this market, we continue to like natural gas for the very long-term – particularly as hurricane season creeps closer and the risk of damage to natural gas operations in the Gulf heightens.

If you’re thinking of initiating bullish trades, you can do it through the natural gas futures options market on the NYMEX, or on the market’s main ETF – the United States Natural Gas Fund (NYSE: UNG).

A Wide Range For Crude Ahead

Crude oil continues to swing in large ranges.

The May futures contract just hit a near-term high of $54.66 per barrel – a significant jump from its low of just under $40 last month. But with a bout of profit-taking in the mix, the contract’s 20-day moving average has moved to support near $49 per barrel.

Depending on the mood of the market, we could see oil hold at this level and head higher again. If it doesn’t hold, though, we could see a drop back down to $40 very quickly.

Regardless, our near-term trading range for oil continues to fall between $30 and $60 a barrel.

Metals Pause For Breath… But Get Ready For The Next Move Higher

With gold and silver having recently tagged highs ($1,000 per ounce for gold and $14.50 per ounce for silver), both have taken a bit of a breather and retraced some of their gains.

This kind of profit-taking is perfectly normal – and is actually a good thing, as it gives the markets a chance to consolidate in preparation for the next leg higher. We still believe this will happen.

For gold: We don’t see the front-month futures contract (June) trading much below $870 per ounce after the current pullback is over.

For silver: We shouldn’t see a price much below $12 an ounce for the May contract.

With the stock markets still unsteady, many investors are sticking with metals as part of a diversified portfolio.

Aside from using limited-risk option strategies to play gold and silver futures options on the COMEX market, you can buy outright shares of the ETFs that track the price performance of gold and silver – the SPDR Gold Trust (NYSE: GLD) and iShares Silver Trust (NYSE: SLV) respectively. You can also play options on these ETFs.

Could Winds Whip OJ Into A Bullish Frenzy?

Keep an eye on the orange juice market. It’s definitely bounced off its yearly lows near $.65 per pound and has trended higher to its current price of $.77 per pound.

Orange juice is a market that heats up towards the late spring/early summer – and is then on full “hurricane watch” from June until November. We’ll continue to post the monthly chart of orange juice as a reference point of where it’s been before – and could potentially go again.

That’s all for this edition. Catch you next time.

Source: Natural Gas: Another Chance to Profit As This Commodity Takes a Tumble

Serenity Now! Serenity Now!!
- Frank Costanza, Seinfeld

Let’s see, how can I put the appropriate subtlety and nuance on this…

Get. Out. Of the U.S. Dollar. NOW.

Do not pass go, do not collect $200, do not stop to conduct an impromptu inventory of your unmentionables.

In the slightly profane vernacular of internet slang, just GTFO. Do not walk, RUN, to the nearest exit. Barring that, find the most appropriate hedge for your dollar-denominated investments and GET THAT HEDGE ON. Toot sweet.

If you don’t know of a high quality dollar hedge off the top of your head – other than those oldies-but-goodies, gold and silver – then you’re in luck. I’m about to tell you (yet again) about an excellent anti-dollar counter measure that is smart, IRA eligible, FDIC insured, and set to deliver potentially staggering returns over the next 12 to 18 months.

But first, let me catch my breath.

Whew. That’s better…

Cool Customer Nearly Spits Out His Coffee

Now that I’ve composed myself a little, let me apologize for the above outburst. Your humble editor is normally more reserved than that… a cool customer, if you will (except for the occasional temper flare-up in response to what comes out Washington).

The reason for this morning’s mini freak-out was a Financial Times bulletin that, quite literally, almost made me spit coffee all over my keyboard. Here are the first two paragraphs, reproduced just as they hit me between the eyes:

China wants dollar replaced as reserve currency
By Jamil Anderlini in Beijing

Published: March 23 2009 12:16 | Last updated: March 23 2009 14:22

China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

The goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies,” Zhou Xiaochuan, governor of the People’s Bank of China, said in an essay posted in Chinese and English on the central bank’s website.

Remember that old advertising jingle, “Uh-Oh, Spaghettios?”

One might say this could mean, “Uh-Oh, Confetti-O,” for the greenback.

On Friday we talked about Financial MADness and the complex gamesmanship playing out between Washington and Beijing.

If Beijing’s mandarins are engaged in a high stakes game of poker with the Fed, then Monday’s thinly veiled “death to the dollar” statement from China was the equivalent of raising the stakes by an order of magnitude.

This is huge news, folks. I don’t know how else to put it. It may take a little time for the forex market to further digest the implications of this blow – due to shell-shock from last week’s big news and whatnot – but the fallout shouldn’t be long in coming.

Now, getting back to that ideal dollar hedge… one which could do BETTER than just gold and silver by the way… to explain why it looks so compelling now, I first need to lead in by telling you about a very small country set to reap an astonishingly large windfall, courtesy of Fed Chairman Ben Bernanke.

This Tiny Country, Pop. 4.8 Million, Could Reap Hundreds of Billions From the Fed

When the Fed announced its intention to create a trillion bucks out of thin air last week (by printing up dollars with which to buy bonds and mortgages), few had more reason to be pleased than a quirky, introspective man named Yngve Slyngstad.

Not to be confused with Yngwie Malmsteen (the glam-rock ‘80s-metal guitarist), Yngve Slyngstad is a former scholar of German philosophy. With his slim build, shaven head, and Teutonic goatee, he certainly looks the part.

But Slyngstad is no philosopher or academic… he is the CEO of Government Pension Fund-Global, Norway’s (rather clumsily named) sovereign wealth fund. Thanks to Norway’s $300 billion pool of assets – the third largest in existence – that CEO title also makes Slyngstad one of the most powerful investors in the world.

The reason Yngve Slyngstad (and all of Norway) should be deeply grateful to Fed Chairman Bernanke is because of the electrifying effect the Fed’s dollar-destroying actions will have on hard assets – with China’s recent announcement pouring kerosene on the flames.

Norway, you see, is the fifth biggest oil exporter and third biggest gas exporter in the world. That’s how a country of 4.8 million people – just over half the population of greater Los Angeles – managed to amass $300 billion in savings, or $62,500 for every man, woman and child.

Again, to understand how Norway has just been handed yet another mega-sized windfall, just consider what effects a plummeting dollar will have on the price of oil and gas.

Here Comes the Triple Whammy

If you pull up a crude oil chart (or USO, the popular oil ETF), you will quickly see that oil has already worked its way through a multi-month bottoming process.

But to really understand how the energy markets will respond to a collapsing dollar in the longer term, let’s take a look at a 60-minute chart of the United States Natural Gas Fund (UNG:NYSE).

When news hit the wires of the Fed’s trillion-dollar printing spree last Wednesday, natural gas jumped like a scalded cat with boiling hot water poured on its back. It took oil and gas traders a time span of roughly two seconds flat to realize that if the Fed and Treasury are well and truly going “all in” in terms of printing money to save the U.S. economy, the nominal price of dollar-denominated hard assets should shoot up like a bottle rocket.

China’s remarks on Monday, and the reality of America’s fiscal situation, mean that the dollar has a lot – and I mean a LOT – further to fall. We’re talking journey to the center of the Earth here.

It may well be in fact, too, that many paper currencies have troubles ahead, as country after country engages in a “race to the bottom” in an effort to monetize debt and shore up export sales. But, as we have said repeatedly in these pages, nobody but nobody does it bigger or better than Uncle Sam… and that includes unleashing weapons of mass currency destruction by way of the printing press.

This is great news for gold and silver. But if the period of paper currency debasement comes against a backdrop of global recovery in emerging markets, it could be even better news for hard assets like oil and gas and copper… and hard-asset PRODUCERS like Norway, Australia, Canada and so on.

The potential “Triple Whammy” is an explosive cocktail composed of the following three factors:

• Hard assets rising in price as the result of extreme paper currency devaluation.
• Oil, gas and metals being repriced upwards to reflect economic recovery and renewed global demand.
• Supply constraints, bottlenecks and peak oil concerns coming back to the fore with even more vengeance than before as a result of production cutbacks and outright shutdowns due to the credit crunch.

If we get just two of those factors working in concert, oil is on its way back to triple digits. And if we get the mojo of all three working at once? Whoo doggies. Crude could be back at $150… or even $200… before the decade ends.

And Yngve Slyngstad could well have a big smile on his face as Norway’s investable assets soar from $300 billion to $400 billion… $500 billion… or even beyond.

The looming “Triple Whammy,” in other words, is absolutely fantastic news for the “hard asset” economies – countries like Norway, Australia and so on – that make their bread and butter from hard assets: stuff like nickel, uranium, iron ore, and of course, oil and gas. That means serious upward trajectories for their currencies too.

Which finally gets us around to…

How to Hedge – And Profit Too

Earlier I pledged to tell you about a truly excellent hedge – a way to counteract the diving dollar that could prove as good as, or maybe even more worthwhile than, traditional precious metals holdings like gold and silver.

The hedge I was referring to is the EverBank Ultra Resource Index CD. Conceived by the Taipan Publishing Group and created by EverBank at our request, the Ultra Resource Index CD offers a basket of the following currencies:

• Australian dollar
• Hong Kong dollar
• Canadian dollar
• New Zealand dollar
• Norwegian krone
• Singapore dollar

If the name “Ultra Resource Index CD” sounds familiar, that’s because we’ve already told you about it. As a matter of fact, in a special webinar for Taipan readers and subscribers not too long ago, Sara Nunnally and I specifically went over the attractiveness of the various commodity currencies… and specifically predicted that the dollar would soon crash.

Here’s proof, direct from the webinar transcript:

JL: And when would the time to act be? Do you see a window of opportunity here?

Sara Nunnally: Yes, the time to act would be soon because all these currencies have been discounted by the crash of 2008. When we saw the “margin call to the system” as you put it everything was thrown out the window in the face of a panic rise in the U.S. dollar and Treasury bonds.

JL: So when the global economy roars back to life again and the dollar buckles under the weight of the printing press, these currencies could appreciate extremely quickly.

SN: Absolutely.

Doesn’t get more direct than that, eh?

Now there’s good news and bad news here… the bad news is that you would have been better off acting on the opportunity the very first time the webinar aired. Since that time, the “commodity currencies” have jumped substantially. (Just check out charts of the Canadian and Australian dollar to see what I mean.)

The good news is, it’s still not too late to act. One nice thing about currencies is, when they trend they REALLY trend. We could be in the early stages of a new paradigm shift – away from the greenback and towards the currencies of the world’s hard asset producers and “ultra resource” countries – that lasts for years and years. If so, the time to get involved is right now… before the dollar falls down another six flights of stairs.

To make sure you get a full sense of the scope of this opportunity, I asked our web team to set up a special re-viewing of the original webinar – a discussion between Sara Nunnally and me – explaining just what is happening now and why in the world’s major currencies.

Keep in mind that this webinar was originally broadcast a little while ago and basically predicted the flow of current events… with that in mind, you can access a special re-viewing of the “ultra resource” currency webinar here.

Or, if you have already seen the webinar but chose not to act on it the first time… or if you fully understand the argument and simply want to go straight to the details on how to sign up for the EverBank Ultra Resource Index CD… then you can find out what you need to know about the Ultra Resource Index CD here.

Keep in mind, too, that the Taipan Publishing Group has a mutually beneficial relationship with EverBank. They occasionally create CD products for us (like the Ultra Resource Index CD), and we in turn receive a small commission when those products are sold. I feel strongly that it is a win-win-win relationship: not just for Taipan and EverBank, but for you, our beloved readers and subscribers.

And remember: “Uh-Oh Confetti-O” doesn’t have to mean “Uh-Oh” for your investment funds or your retirement. Through various trading and investing opportunities, not to mention “big picture” type opportunities like the Ultra Resource Index CD, you should be able to survive… and thrive… in the midst of the greenback’s flaming demise.

Source: Get Out of the U.S. Dollar Now. Right Now. This Is Not a Drill.

Anyway, with Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) getting bailed out last week, Lehman’s bankruptcy comes at the same time as Washington Mutual (NYSE: WM) and insurance giant American International (NYSE: AIG) teeter on the edge of bankruptcy, too.

So now is the time to take a look at the latest carnage unfolding within the financial sector…

If You’re Investing In Financial Stocks… Here’s What You Need To Do

Despite the recent woes in the financial sector, it actually wasn’t faring too badly. Since the markets bottomed out on July 15, some banks have performed very well. Like BB&T Corp (NYSE: BBT), for example – up a whopping 82% – and US Bancorp (NYSE: USB), which has risen 64%.

Aside from the obvious major problems in both the bank and brokerage sectors, the brokerage stocks, which use more leverage in their businesses, seem to be getting the worst of it. For example, while USB was making a new two-month high last week, Merrill Lynch (NYSE: MER) traded at a 12-year low.

The moral of this story is this: If you’re going to trade the financial sector from the long side, you’d better do your homework and stick with these well-capitalized banks.

On the other hand, you can diversify and lower your risk from the sector through one of its most widely traded ETFs – the Financial Select Sector SPDR (AMEX: XLF)

As you can see below, the stock has remained stuck in a consolidation pattern since late July.

The Offsetting 85

However, this consolidation pattern is a bullish one – and for a good reason.

Because XLF is comprised of more than 85 stocks – mostly including banks, brokers, and insurance companies – when some of them are faring well and some doing poorly, the resulting action is sideways trade.

However, XLF appeared to trigger a daily buy signal off the July 15 lows and unless an alternative upside target is generated, the stock should eventually trade up to at least my minimum target around $24.40.

And that gives investors a good, low-risk opportunity to buy.

That’s because in the wake of the Lehman fallout, the stock will probably trade back down to the bottom of the consolidation pattern in the $19-$20 area. Beware, however…

A Financial World Still Crumbling

If you’re looking to invest in financials in hopes of grabbing some bargains, remember that the sector is still in crisis. Moreover, nobody really knows for sure if other institutions will stumble down the same path to bankruptcy as Bear Stearns and Lehman Brothers.

The best course of action is to wait for the dust to settle and see if XLF can hold the $19 area.

And on a broader scale, the S&P 500’s low for the year is 1,200.44. If the index closes below that level, it should have further to go – in which case, I’d hold off on buying anything until the dust settles.

Commodity Rewind… And Flash Forward

In the last couple of editions of “Sector Watch,” we’ve looked at some of the commodity sectors, including energy and gold, along with their related ETFs.

According to the analysis generated by the trading system I developed for my 1-2-3 Trader service, we noted that they all had bearish daily chart patterns.

And over the past couple of weeks, the US Oil Fund (AMEX: USO), SPDR Gold Trust (AMEX: GLD), and the US Natural Gas Fund (AMEX: UNG) have all made new correction lows.

In fact, USO and GLD have similar chart patterns and they reached my minimum downside objectives over the past week. With UNG, the chart is more complex and it’s hard to tell at this point if the “C” wave (or “3rd wave”) is complete.

Regardless, most of the commodity sectors are now reaching oversold territory and if nothing else, we can probably expect at least a decent rebound to work off the oversold conditions.

USO and GLD are now all set up for daily buy signals, so the risk of being short is increasing.

That also goes for the Powershares Commodity ETF (AMEX: DBC). Let’s take a fresh look at the chart…

We originally highlighted this chart in the August 25 edition of “Sector Watch.” At that time, the stock was trading above $38, and the “C” wave decline was just getting underway. Since then, the stock has made new correction lows and reached my minimum downside objective of $34.60.

So as I said, the same theory as USO and GLD applies here: The chart is set up to trigger a buy signal, so be wary of going short at this point.

We will revisit the commodity ETFs once we see what unfolds from here.

Take care till next time.

Jim

Source: If You Invest In Financial Stocks… Here’s What You Need To Do