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Investment Opportunities In Commodities Markets

This is the transcript of a live webinar, hosted by InvestingHaven.com, about the topic of investment opportunities in commodities markets. The expert and analyst of this webinar is Rob Tovell, with +3 decades of experience investing and trading global commodities markets. Readers can subscribe for our upcoming webinar How To Survive And Thrive In Today’s Difficult Market or How To Include Central Banks And Monetary Policies In Your Investment Strategy.

Question: When you look at the current state of the commodities market, now, how attractive do you think that commodities as a group are, when you compare them with the broader stock market and bonds and currencies. In other words, are commodities as a group an interesting investment opportunity?

Rob Tovell: I’m going back to my roots here with commodities. I like the commodity area because of its relative transparency. You know we get supply and demand reports from the government. There is a lot more transparency in commodities markets as opposed to a corporation that sits there and through clever accounting makes a profit. If they want their stock prices to go up, they just have, they institute a stock buying program.

I’m a little harsh on stock markets as I did work in the investment banking side for a few years and was involved with market-making activities (not directly though). The game is rigged, and I’m here to tell you right here right now and if we have time at the end of the webinar I will actually show you how it’s done.

You can manipulate anything really, but it’s a lot harder to hide a boatload of sugar or trainload of corn, it’s a lot easier to fudge around with financial statements. The long downward slope of three years of commodities can be correlated back to the strength of the US dollar. As the US dollar is beginning to turn and start to head down, I think we are going to see commodities rally and I think we’re going to see some really good opportunities emerging.

Question: If you would have to pick I would say the most attractive commodities investment opportunities right now, say for the medium and longer term, now which specific commodities would you be looking at?

My favorite one is soybeans, although I have not yet an actual buy signal. The soybeans chart on the left is the daily chart and on the right a weekly chart. I am a true believer in trends, so let’s look for the trend in soybeans.

Trends, once they start are extremely persistent and they are extremely difficult to turn around especially in the commodities in foreign exchange markets just because of the fundamental factors that ultimately drive these things, they can last for years. I’m looking for a new market to trade. I might only trade for a day or two and then get back on again for a week or so, but I’m following the longer term trend all the time.

Here is a quick little lesson on how I see my analysis on the chart on the right: we can see the price has moved and crossed above sort of the mid – the longer term average, this one right there. Now, that’s a 52 weeks, and we can see that it’s been down, down, down, down and now, it is starting to turn up like so. You can see that sort of bottoming position here.

And, again, for the last three weeks the soybeans had been very strong. I now, anticipate price to come down a little bit like so, then I expect that longer term moving average to begin its upward slope. It is going to take an awful lot to turn that slope around, so I will be over the next planting season and it’s a little early yet up here, but in the next six weeks we’ll get planting counts so the fundamentals will start to affect things. I do believe that we are seeing a weakening US dollar and therefore I see higher soybean prices going forward.

Of course, they can have a bumper harvest in September and the prices come down, that will be a supply and demand thing, but as it sits right now, I’m very bullish on soybeans.

That’s my top pick as far as a new emerging trend. When trends start to emerge like this, they’re very hard to spot.

Then, of course, the metals. I’ll just get a little weekly chart. Again, you see that sort of that same type of behavior where we have this big long down trend on the 52-week average and it is now turning. So, right now it’s a little flat and that flatness is really a function of this consolidation up here.

And, so but once we see this move, I think gold is going to pull back a little bit. It should pull back even as far back as 1163. It could pull back to 1163 to 1170, and still be a healthy bull market. It’s going to shake out people with weak positions that might be too highly leveraged.

So, if you are trading the metals back off on the leverage right now, keep a small position so that you can sleep at night because we should get a pull back and that would actually be healthy. I’m not buying yet, I’m waiting for a pullback myself.

Question: We talked about investment opportunities, but what are the risks when investing in commodities? And what type of risk do I have when I’m selecting a commodity ETF?

The reason commodities are risky to the average investors and to a lot of institutional traders too that take advantage of it is because of the leverage that’s involved.

If you think about it when you go buy a stock, the best your stockbroker is going to give you is 50% margin. When you’re trading a commodity, it’s only 5, you know 3, 5 at most 10%, you know when the market starts moving they’ll up those margin requirements up to maybe 10%. So, you right out of the get go, you are dealing with an awful lot of leverage, but if you actually look at the daily price movement of a commodity, a lot of the stocks move much more on a percentage basis day by day than the commodities do.

So –what it comes down to when you’re trading commodities is learning how to sort of make that distinction in risk. If you really want to gain exposure to the commodity markets, I actually recommend to trade longer term options and verticals spreads. And if you don’t know what those are we can worry about that on another webinar.

But, you can actually take very full advantage of commodities through the options market in a way that’s not all hype alike. Some people think “options, oh, my God, those things are terrifying.” Well, yes, they are, but they can actually be very, very good weapons in your – in your arsenal for trading commodities when done properly.

ETFs have not been my favorite things and not that there’s anything wrong with them, it’s just I find that often if you’re watching a futures market and it depict. It depends which ones that you are looking at: each ETF is not created equally. I have actually played around trading direction, the three times bull and three times bear. And, on a couple of occasions I’ve actually watched the Russell Index go up, but the actual three times bullish actually went down and it was just weird because they start doing stock splits. So you want to look for the pure play. As attractive as the leverage ones are they get monkeyed with when they’re adjusting the portfolios and they get adjusted with one commodity is expiring.

And with those pure plays we know that volume is a very important parameter to watch because some of these ETFs are so small that once you want to sell them for instance, that there isn’t enough volume in the market, so that’s an important criterion to take into account when selecting an ETF.

Question: What is the outlook for crude oil prices both the long and short term? Is crude oil and attractive investment opportunity?

We can see our 52-week average: it had a nice slope coming down and it’s now backing off, but it has not turned yet nor have prices move above it. So, from that standpoint, I would say it’s not ready to buy yet.

However, our sort of our medium term average here, that one has indeed sloped up, so I call this being off trend. Short term bullish, mid-term neutral, so what I want to see is some kind of resolution on the fundamental side. If we can see some fundamental easing in the crude oil market as far as production goes, I think we can actually see prices start to rally again.

The other thing that’s going to play a big role is the US dollar. If we see the US dollar further weaken, I think we’re going to see higher crude prices. And also, too I’m also watching the Brent Crude, so this is the Brent Crude that we have up and if we just switch over to West Texas you can see that we pretty much have the same situation. We have the same situation there, so the charts are pretty well identical.

So, really, I’m thinking what we need for higher prices is we need some kind of production cut in some way or another and we need a weaker US dollar and that will push to drive the prices up.

Question: How should an investor look at fundamentals versus technicals and, what’s the most important of the two?

Fundamentals are going to ultimately create the direction of the market. What I use the technicals for is to time things.

Now, what do I mean by that? What I mean is if you’re a cattle producer (when you own cows for meat), you take these cows to market. If prices are too low, you can just hold back say only send out a few cows, let the other ones fatten up on the feed lot. So, you can see by way of prices how and what the producers are doing.

I can show you how we used to manipulate prices, and I would actually do this with stock is when prices were going up, I will hold it back. Let’s say I have a possession of twenty or thirty of forty thousand shares of something, when prices were moving up, I would hold back, when prices were going down, I would sell them into strength. I don’t have any indicators other than my moving averages, I look at purely the price.

So, I think that investors need to look at both. You don’t need to sit there and talk about Fibonacci Retracements and Elliott Wave and all these other stuff. Just look at the chart and look at the fundamentals: check whether fundamentals are bullish, but prices are dropping or vice versa. And when you see that, stay clear, don’t fight price and don’t fight the fundamentals, only make your investments when you’ve got the fundamentals and this very simple technical glimpse at a chart when they’re both doing the same thing at the same time, it is time to jump on board.

Question: The next rally in precious metals?

Gold is in this consolidation pattern and this now has been going on. This is a weekly chart so we’ve been stuck here for almost three months, we’re sort of in stuck in this $80 range.

Now, the one thing I strongly suspect is going to occur is that we are going to pull back. Now, that is going to be the time to buy my long term look at gold. I was looking about 1345 somewhere up there for gold, in the not too distant future which is right up here.

Around 1345 is what we’re going to see in the near future. Now, whether that near future means three months from now or three days from now, it’s really hard to tell with the way these markets are moving at the moment, but I do ultimately think we’re going to see that. We’re definitely going to see that this summer. And then, quite possibly, we’re going to get into the 1500 sooner than you think, perhaps by year end.

Question: What is the outlook for lithium going forward in 2016 and beyond?

I don’t really follow all base and rare metals, like uranium, lithium, and some other rare earth metals. What I uncovered was three or four companies control 90-92% of the entire world’s production of lithium.

Lithium is actually in a downtrend. You would expect that it would be going up through the roof, as lithium is in everything nowadays: from the power tools, to cordless drill lithium batteries, cars, home batteries for solar power, …

I just saw a new lithium battery power cell for a house. So, you would think that these prices will be going up and up and up. The problem is as individuals, we don’t know what the price is because there’s no open market for it. Those four companies control the market in it and not only that it gets worse as far as trying to do a pure play in lithium is those companies only 10-20% of their entire bottom line is a direct result of lithium.

So, until we’ve got a futures market in it or some kind of pure play in it which is too bad, I don’t know how to trade it. I would think that with the surging demand prices will go up.

Question: Is cattle bottoming?

Here’s my chart on feeders and just like what we are talking about on those other markets how I wait for my turn, I’m not so sure that the feeder in the case of the feeders that were there yet. We can definitely see some upward movement,. We can see this bottom chart is the daily chart and it’s just heading down. The bears are just mauling these things and I don’t see any flattening on that 52-week average.

I look at the three-month average and I look at an annual average. And, right now, with the feeders, it’s still going down, so it’s still falling nice and I’ve kind of want to stay clear of that for the time being. When we check the live cattle, we can see the same basically the same chart, only we’re getting a little bit upward movement, but, again, too scary for me. Don’t ever try to pick up bottoming commodities. Remember we’re talking about that leverage, this is where it will really – it can really hurt you is when if you try to pick a top or bottom in commodities with 5% down, you can get hurt really fast.

Question: Your outlook for uranium?

Now, it was almost the same as with lithium. In Canada, there is Cameco, and they do a lot of uranium. I was checking their financial statements and the price seems to be going down. I don’t know enough about the industry to understand why prices seem to be going down.

Again, it’s back to this pure play thing again and it’s very difficult to isolate a producer that exclusively does uranium so because they might be mining copper and find uranium or mining gold and find a little bit of uranium or lithium or whatever these things are so that may set relatively small amounts to their bottom line.

So, you don’t want to go running out buying a company stock just because they produce uranium or they produce lithium and, that would be a mistake because, you know, an adverse price move in another product that they’re mining is going to take their stock down and whether or not lithium is going through the roof or uranium is going to through the roof. So, you have a lot of risks in that, you know, trying to play that. So, again, I would sit there and say don’t buy a stock just because they produce uranium, it’s not going to be really effective bottom line.

Question: Is coffee breaking out?

I believe so, and here comes the chart. This base, however what it has been doing and you can see it on the weekly chart, it is sort of got this slight downward movement.

But, what do we know about trends? How do I define a trend? I define a trend as a series of lower highs. That said, coffee is heading down.

But, there is a change in the last couple of weeks. Now, we have a situation albeit it’s very young, and what I want to see is a higher high. We’ve got the flattening on our moving average, so I think it is bottoming, but, again, I wouldn’t buy it yet.

You know something really bad could happen in Brazil and they could lose, you know, a crop and shoot it up which is fine or they find the whole bunch and shoot it down, but I really think that this nice double bottom and we’ve got as I say we now have a higher low. So, I think we’re close, but I wouldn’t go yet.

Question: Is natural gas in a bull market and do you think that 213 the resistance zone will be cleared?

think we’re turning here as well just like the coffee. We can see here on the daily chart down at the bottom that we’ve got our series of basically higher lows going in as well as higher highs.

So, in the short term we are in a bull market, we are trending higher. If we look at them on a weekly chart, we’re still heading down, right? So, my moving average is heading down and we’ve only just began our higher high sequence and our higher low sequence, so it is definitely in the process of turning.

Personally, just throughout the years my 52-week average has really stood me well in that once we get above it or below it, that’s when the trend really starts to go. And, I’m going to just give you another little tidbit that I found works well too as traders. I, as a trader am not so concerned about price. I know everybody is thinking “You’re supposed to buy low and sell high.” True, but you can also buy high and buy higher.

But what’s more important is the direction that the market is going. Really, it is better sell at a slightly lower price, but have it go your way almost right away.

I tell people not to be so conservative about selling the absolute higher buying the absolute low, wait ‘till you’re 80% confident in the direction that the market is going to go, that is when you trade. I learned that from a couple of floor traders in Toronto. They said, “Rob, don’t even bother trying to pick the top and bought them. We’re in it this to make money not to show off. The easy money is the 70% lead 15 on the top 15 on the bottom and take the 70% in the middle. That’s how you make money in trading.”

So, don’t focus – and that’s why I trade the way I do and that’s the way I analyze the markets the way I do. I learned very early on in my career don’t worry so much about the price, if you’re going to buy the company, that’s different. It’s the trend that’s going to make us money not buying the high or selling the low or vice versa.

Question: Is a three-year decline in grain markets and is asking whether you think the tide is turning and what the probability is of a longer term of trends starting here?

We can see this incredible downward move followed by sort of a sideways market and it’s just killing people. People are trying to trade it and you’re just getting whipped some days they make 20 cents some days their limit down.

We’ve got this bottoming situation in corn, we’ve gone above our moving average, then we came crushing right back down again. Remember, when we were talking about this earlier vis-à-vis the US dollar and now, it’s just for – it weren’t coming right back up again and bouncing right off of that level that we’ve been talking about right there, right? That’s where it bounced.

We’re getting the same thing in wheat. Where is wheat? There is wheat, only as you can see here we’re still below, we’re still below that level, but soybeans are going up. If you look at the entire soybean complex mill and oil, they’re way up as well. And, if we look at wheat on the daily chart, we can see how this thing absolutely went streaming up, came back down and then here this moving average is my 60, remember I think I called it my fiscal quarter. That is equivalent to my 12-week average and then we bounced straight off it.