Commodities: Volatility sparks selling and boosts scope for gains

For the past 10 years it has seemed there is only one direction for commodities, and that is up.

In recent months, however, crude oil and other commodities have been battered, leading analysts to suggest the boom is over.

ICE July Brent, the global benchmark, has fallen from a high of more than $128 a barrel at the beginning of March to about $106, while US crude, the Nymex July West Texas Intermediate, dropped below $90 a barrel from $110 at the start of March.

On May 30, US oil prices fell to their lowest levels since mid-October last year at $88 after pending home sales for April slid sharply, according to CMC Markets, the spread betting company.

Meanwhile in mid-May a sharp turnround in gold saw the metal price briefly enter bear market territory, down 20 per cent from its high to $1,530 an ounce. Experts say the metal has suffered on the back of better economic data from the US that has dimmed hopes of further quantitative easing.

"We have seen significant weakness for commodities lately," says David Jones of IG Index, the spread betting company. "The likes of copper and oil have been hit by the continuing downbeat news surrounding global economic growth - or rather the lack of it."

Experts say the continuing concerns about the eurozone crisis have weighed heavily on sentiment in recent months as investors have moved to unload risky assets.

"Commodities do tend to sell off sharply during periods of intense market stress - as we are seeing now with the eurozone sovereign debt crisis, as investors liquidate positions to pay for lossmaking trades elsewhere," says Kathleen Brooks, research director at Forex.com, the online currency trading platform.

Oil prices have also suffered as volatility in the equity markets has sent haven capital flow to the US dollar. "As most commodities are priced in dollars, price action generally moves inversely, so a stronger dollar has for the most part resulted in weaker oil and gold prices," says Brenda Kelly of CMC Markets.

While some analysts remain bullish about prices in the long term, others warn the so-called "commodities supercycle" could be coming to an end amid concerns of slowing demand from China.

"If economic confidence drops further the outlook for commodities does not look good and, with European politicians seemingly incapable of forcing through a solution of the over-indebted south, the momentum will probably continue to the downside," says Simon Denham, chief executive officer of Capital Spreads, the spread betting company.

But experts say the increased volatility of oil prices has provided more trading opportunities for retail investors.

"The resultant volatility means the potential for profits - and losses - in this area remains the key attraction," explains Ms Kelly. "As with most derivatives, the ability to take short positions on commodity prices also helps."

Mr Jones says crude oil is a favourite with the "more nimble" traders, those who are happy to flip positions from long to short, depending on the prevailing short-term trend in that market.

Traders typically are taking a short-term view, looking to ride the next $1-$2 move, rather than taking a medium-term view.

"The simplistic way to profit is to get the direction of the commodity correct, whether your timescale is hours, days or even weeks. This, of course, is easier said than done, particularly when we have the increased volatility seen in recent weeks," says Mr Jones.

Ms Kelly adds CMC Markets has seen an increase in short position holdings over the medium term for oil, while in the shorter term, some traders have had intraday positions running contrary to the overall trend to take advantage of price corrections.

In comparison, IG Index says traders still prefer to buy dips in gold and hold the positions for the medium term, looking for a bounce and a possible hedge against further eurozone shocks.

"With gold there is still a buy-and-hold mentality, no doubt as a result of the perceived haven status and the prevailing trend over the past 10 years plus," notes Mr Jones.

However, experts say the volatile conditions also mean traders need to consider having wider stop losses to give the market time to prove them right.

Mr Denham says traders should keep their bets small. "If you are thinking of placing a trade and your usual size is X, only do 30 per cent of X. In this way you will maintain liquidity and enable your account to ride through the rough points."

As prices decline, analysts say some traders have chosen to go long on commodities, even though the eurozone sovereign debt crisis is still raging.

"At a certain point commodities like oil and gold, due to its perceived haven status, are going to be viewed as cheap and good value, especially in comparison with bond markets," notes Ms Brooks.

© The Financial Times Limited 2012. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation