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July 31, 2015 - Commodity Futures Forecast
The Fed Can't Stop the Commodity Bear Market by Elliott Wave International
Only a shift in investor psychology -- i.e. the Elliott wave pattern -- can.
For many commodity investors, the last four years have felt like one long, bad dream. The kind where you're tied to a railroad track as a train heads straight for you -- in slow motion. You can't move, can't scream, can't do anything but lay there and wait for the point of impact. On July 29, that point seemed closer than ever when the S&P GSCI index, a measure of a basket of 24 commodities, plunged to its lowest level in 13 years.
Meanwhile, the bellwether Thomson Reuters Core Commodity CRB Index dove to a 7-year low, having dropped 34%-plus since June 2014.
But, according to the mainstream experts, there's one surefire way to stop the commodity bear market train in its tracks; namely, the Federal Reserve jumps into the conductor's seat and slams on the brakes via easy money and low rates. Here, a July 29 news source cuts to the chase:
"Driving the selloff in commodities are expectations that the Fed will raise borrowing costs in coming months, a move that investors expect to further boost the dollar and pressure the prices of commodities.
"It's hard to see how the Fed would even consider hiking rates against such a weak backdrop."
From our standpoint, it's hard to see how belief in the Fed's ability to re-route the commodity rout persists -- even as the facts say otherwise. Case in point: If maintaining a loose monetary policy is good for commodities, then why did the market crash 60% in 2008 -- the same year the Fed slashed rates seven times to record low of 0-.25% while launching the first round of quantitative easing?
Chalk it up to a glitch, perhaps?
Not likely. Because in 2011, as commodity prices came barreling back to multi-year highs, the same Fed-led explanations reemerged. After all, the world's largest central bank was smack dab in the middle of injecting a few trillion more dollars into the U.S. economy via QE 2 and QE 3. The mainstream saw no reason for the commodity bull run to end, to wit:
In April 2011, the Daily Sentiment Index (prepared by Trade-Futures.com) showed the percentage of commodity bulls at a record 93%.
Yet -- that same month, the Thomson Reuters CRB Index peaked and turned down in the four-year long, 30%-plus bear market we see today.
Despite the Fed's supposed pro-inflation, rate-slashing, money printing campaign, our May 2011 Elliott Wave Theorist identified a perfect bearish trifecta on the CRB Index's price chart: A three-step, countertrend rally ... inside of a parallel trend channel ... at a [Fibonacci] 62% retracement:
With all these changes occurring, the commodity rebound -- it has not been a bull market -- is probably over.
I think the dollar is starting a 5-year bull market, which will coincide with a bear market in everything else."
Two years into the commodity selloff, our November 2013 Elliott Wave Theorist put the fallacy of a Fed-led market to bed:
Charts tell the truth. Notice the four short arrows on the chart. Based on their positions, you might think they would mark the timing of accurate sell signals generated by a secret indicator. But there's no secret indicator. These happen to be the times at which the Fed launched its inflationary QE programs!
Investors believed the Fed's QE actions would be bullish for commodities. But -- ironically yet naturally -- every launch of a new QE program provided an opportunity to sell commodities near a high.
None of the believers in omnipotent monetary authorities and their pledges to inflate saw any of those changes coming. Meanwhile, we couldn't see how it could turn out any other way.
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What Are Futures?
In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. The future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price.
A futures contract gives the holder the obligation to buy or sell, which differs from an options contract, which gives the holder the right, but not the obligation. In other words, the owner of an options contract may exercise the contract. Both parties of a "futures contract" must fulfill the contract on the settlement date. The seller delivers the commodity to the buyer, or, if it is a cash-settled future, then cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position has to offset their position by either selling a long position or buying back a short position, effectively closing out the futures position and its contract obligations.
Futures contracts, or simply futures, are exchange traded derivatives. The exchange's clearinghouse acts as counterparty on all contracts, sets margin requirements, etc.
According to Jim Rogers, "commodities get no respect." Here are a few reasons why he thinks they should: they are easier to comprehend and study than stocks and behave more rationally since they are subject to the basic laws of supply and demand; they have outperformed many other investment options in recent years; it is foolish to ignore an entire sector of the marketplace; and a bull market is currently under way in commodities--a trend that Rogers expects to last for a least a decade longer. Further, Rogers believes that you cannot be a successful investor in stocks, bonds, or currencies without an understanding of commodities. Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market is designed to introduce the novice to the basics of investing in commodities as well as explain what they are and why they are important. In doing so, he shatters some myths about the relative risks of commodities, explains the relationship between the stock and commodities markets, and provides a succinct analysis and history of the global oil, gold, lead, sugar, and coffee markets.
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