Commodity Pointers

There are a number of pointers you should be aware of if you are spread betting on the traditional commodities. With ‘soft’ commodities, which are growing goods such as sugar, you should always look for an annual cycle in the prices. In the case of sugar, there are actually two crops because sugar comes not only from sugar cane but also from sugar beet which itself accounts for 20 to 25% of the market. Prices tend to fall during harvest times, as by then the crop is assured, so there is less reason to pay extra for the guarantee of supply. Sugar beet is harvested in early autumn, just before the frost, but sugar cane is harvested early in the year. From May through July sugar prices should be strong, corresponding to the planting time when it is most at risk. As the crop has developed by the end of July, you can expect prices to go down. These are general guidelines, because the move of the prices will be dictated by the crop outlook as seen by the market participants. If it seems likely that bad weather will affect the crop, this will impact the futures prices.

In a similar way, you can look into the growing cycle of many other commodities, and trace how the prices will vary during the year. Some commodities, such as livestock, are very dependent on other commodities and the way their prices are trending. Livestock needs feeding, and high commodity prices for grain can be reflected in a higher price for livestock, and perhaps a trend to take the livestock to market earlier in the year.

Commodities have always been seen as leading indicators of inflation. When commodity prices turn up, it usually means that inflation is coming. An interesting correlation is that Treasury Bonds usually decline when inflation is coming, so you can often associate falling bond prices with increasing commodity prices. Similarly, when Treasury Bonds are strong, commodity prices may fall.

 Another correlation is with the US dollar. When the dollar is strong commodity prices usually fall. This is in some ways related to inflation, as a strong dollar keeps inflation in check. It’s useful to run through these relationships when you are considering your commodity trading, as any divergence from the normal pattern would tend to wave a red flag. Many charting packages will allow you to plot the different prices during the year on the same chart, so that you can more easily check the ones that seem to be moving with or against others in a relationship.

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