I believe there are some tremendous opportunities out there right now, particularly in metals -- gold and copper -- if other commodities start acting the way oil has for the last six months. I see it most directly benefiting Yamana
(AUY)
and Southern Copper
(PCU)
.
In my last several columns, I've tried to draw attention to the disconnect between the fundamentals that historically have controlled market prices of oil and the actual price of the commodity. While demand has increased, supply has kept pace for the most part throughout the rise in prices we've seen over the last four years, and particularly the straight-up 70% rise we've seen in the price of the crude oil barrel since January of this year.
No matter how many arguments are put forth describing exponential growth in China and India, geopolitical difficulties in Iraq, Iran and Venezuela and the sinking dollar, it's still not enough to account for the enormous move we've seen in oil. Only one thing ultimately can: speculation. And even the word speculation doesn't adequately describe what's happening here.
What we've seen is a flight into oil as a whole new asset class that's become a necessary part of every good investor's allocation. And while there are about 2,000 companies listed on the NYSE
(NYX)
alone, giving investors a grand choice of where they want to get exposure to equities, in oil there's only one game in town: listed futures on either the New York Mercantile Exchange
(NMX)
or the IntercontinentalExchange
(ICE)
. I don't have to talk again about the rise in managed futures accounts to support this, as I did back in July.
You merely need look at this long-term (going back to late 2003) monthly chart of crude oil traded at the Nymex:
While the price upmove of the top bar chart is painfully obvious, the underlying line chart, overlaying the open interest, is even more one-sided. Open interest is the number of contracts uncovered at the end of each business day. At the end of 2003, that number was hovering around 500,000 contracts. Today, that figure is closer to 1.5 million contracts.
Add to that the open interest of the similar IntercontinentalExchange WTI contract, which only began trading in January 2006 but today sports open interest of close to 600,000 contracts. Together, that represents four-times growth in about four years. That's just in domestic West Texas Intermediate-grade crude oil.
You could also factor in the growth in OI in Brent oil contracts, various sour crude contracts, over-the-counter products describing other grades and forward arrangements and an almost limitless spread of customized derivative products and -- well, you get the idea.
And let me tell you something, folks, something obvious but true: When managers come in to give clients exposure in commodities, they're not sellers.
Now, let's also note that when managers come in to give clients exposure in oil as opposed to cotton, they do it more readily because the fundamental excuses of growth, the weak dollar and geopolitical issues, are so strong. But our key is to remember that these ultimately add up to excuses to continue buying, not value judgments on price.
What we need are other commodities where we can apply the same excuses and invest, perhaps not totally based on value but instead on an increasing influx of managed money that hasn't yet completely run its course. In simple terms, we're going to find commodity-based equities that preferably have had a recent dip and rely on the inevitable flow of capital to return to them. In this environment, that ought to be easy.
Moving from theory to action, I give you the most obvious such commodity first: gold. It's clear that managers have already pushed the premium of this practically useless metal to the sky in the name of client exposure. But let's look at gold for a second.
All of the stories used to rationalize prices around $800 per ounce have been much the same as the oil rationalizations, including the weak dollar and growth in emerging markets. And we've finally gotten a dip, a rather sizable one in fact, that gives us an opportunity to get into a party we thought we had missed. If fundamentals can't support $800 gold, what will stop it from going to $1,500? Truly, nothing.
And with gold stocks, you get almost perfect shadowing of the commodity itself, unlike oil. I'm going to pick one gold stock that looks good technically, Yamana. (But a gold ETF or sector fund might be an even better way to play, depending on your investing needs.)
Yamana's taken a nice, bloody bath in the last week as gold has declined from its highs. Now sitting on support, with stochastic and Bollinger Band strength, I'd be happy to start building a position here.
The next commodity on my list is copper, and my stock of choice is Southern Copper. Fundamentally, copper couldn't sound like a worse pick. Stockpiles are at very high levels, while the cost of mining the metal continues to increase. But copper is trading very close to the lows of a range it has seen for most of the year and should bounce back to the upside as interest returns.
Southern Copper has seen the same kind of pullback as Yamana over the last several trading sessions and looks to me to be ready for a trade.
What about the soft commodities, such as wheat, corn or coffee? I'm not sure the managed futures money is yet looking as closely at the soft commodities as it has the metals and oil, but I believe that will be the case in the near future. Of course, the real issue to be grappled with is how much inflationary pressure the price pumping of commodities is bringing to the economy and what ultimate effects it might bring. So far, I've read little that tackles this subject, but it's sure to become more pressing as time goes on and more money reaches for commodity exposure.
At the time of publication, Dicker was long Southern Copper, but positions can change at any time.Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.
Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.
Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.
Dan obtained a bachelor of arts degrees from the State University of New York at Stony Brook in 1982.
