Monday, December 14, 2009

Banks look like being in the commodities camp in 2010

There are two distinct “camps” that have formed in commodity markets and the dollar; those that believe recent price action is year-end positioning, and those that feel price trends are reversing.

Those that feel price reversals are in the works point out that the $US index has reached its highest level since early November, and more importantly, the dollar is now being viewed in a more favorable light compared to some other global currencies. On the commodity side, the argument is that gold futures are in the midst of their steepest decline since mid-February through early March and that crude oil and grains are starting to better reflect ‘fair value.’

Those that feel current price action is corrective in nature point to the fact that December is often a ‘window-dressing’ month, especially when big profits have accumulated throughout the year. And while the $US is up sharply of late, it has moved roughly only 3% off the lows. The drop in gold futures has been steeper, but is still down only around 9% from longer-term highs. In the big picture, these are very minor moves compared to overall price trends, which signal this is a correction.

We likely won’t know which “camp” is correct until mid-January. Until that time, day-to-day price action in grain markets may be highly choppy as a lot of the grain price movement is still being determined by outside markets.

Producers should be encouraged that it is the former school of thought that is at work. News has recently come across my desk that the major banks were bolstering their commodities desks for what they see as emerging potential in commodities trading. This is due to the upswing in prices this year and in anticipation of greater investor appetite for commodities as demand improves and ahead of an expected increase in economic inflationary pressures.

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