Did the Fed's Comments Trigger a Buy Signal for Commodities?
Friday, August 12, 2011
If food inflation does take hold in the coming months, the price of Corn futures in 2012 may stay at historically elevated levels, especially if US production does come in below current USDA estimates and ending stocks become extremely tight next year. Some more aggressive traders may wish to explore selling fairly deep out-of-the-money puts in Corn futures options going out to 2012, with the expectation that either Corn prices will hold above the strike price sold or they will be comfortable going long Corn futures at the strike price. For example, with July 2012 Corn trading at 738.25 as of this writing, the July Corn 520 puts could be sold for about 13 cents, or $650 per option, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in June of next year should the July futures be trading above 500.00.
Fundamentals
The August Federal Open Market Committee's (FOMC) policy statement seemed to open the door for a potential rise in inflation, despite the Fed's belief that inflationary pressures are moderating. The Fed commented that US economic conditions were weak enough to warrant the Fed Funds rate remaining at "exceptionally low levels" through at least the middle of 2013, which was the first time the Fed actually put a timeframe on its "extended period" reference we have seen in past policy statements. With the potential now for rates to remain exceptionally low for the next 2 years, we may start to see some further pressure on the US Dollar once the current "flight to safety" mentality begins to subside. A weaker Dollar should be a boost to commodity prices, as foreign buyers can purchase "cheaper" Dollar- denominated assets. We started to see signs of this on Wednesday of this week, when commodity futures prices were generally higher across the board, despite another major drop in equity prices. One may argue that the steep sell-offs we saw during the past several sessions set-up a case where commodities were oversold and a relief rally was due. However, if we look at what is occurring globally, with the ECB essentially monetizing the debt of the so called "PIIGS" nations by being the buyer of last resort for the sovereign debt of its troubled member nations, some investors may start to look for alternatives to current low rates of US Government debt. With faith in currencies already shaken, why not look towards hard commodities as a place to move assets. We already see how well Gold has performed in the current turbulent environment, which has made some of its related precious metals, especially Platinum; seem relatively "cheap" when compared to Gold, especially given a historic view on how these assets have traded in the past. One other area that may be of interest is food commodities, as no government would likely want to risk the ire of its populous with the prospects of a food shortage, which should keep demand robust longer-term.
Technical Notes
Looking at the daily chart for December Corn, we notice prices approaching the contract highs on not only the potentially inflationary actions by the Fed, but also by a bullishly construed USDA crop production report which lowered the 2011-12 production estimate to just under 13 billion bushels. Prices are now well above the 20-day moving average, which appears to be keeping the short-term momentum in the bulls' favor. The 14-day RSI has turned-up, with a current reading of 61.49. 750.00 should act as the next psychological resistance level for December Corn, with support found at the lower end of the recent consolidation range near the 653.00 level.
Mike Zarembski, Senior Commodity Analyst
