What Do Oil, Gold and Orange Juice Have in Common? Some Hefty Possible Profits

"So what do you expect from the commodity markets in 2010?"

If I had a dollar for every time I've been asked this question over the past few weeks, I'd be able to buy myself an ounce of gold.

But allow me to tell you the same thing that I've told my friends and colleagues: I'm expecting more of the same. Just because it's a New Year doesn't mean we should expect commodities to behave much differently than they did in 2009.

In my final Investment U column of 2009, I highlighted the crude oil and gold markets as the ones to watch as we headed into 2010.

So far, neither market has been a disappointment.

Although gold and oil have both enjoyed impressive upward runs, you an expect them to remain the key drivers within the commodities sector. The upshot: Both oil and gold remain very promising for 2010 . [Editor's Note: In a recent Money Morning article, commodities guru Peter Krauth said that gold is poised to be "The Greatest Trade Ever."].

Here's my latest analysis, along with some tips on how to profit...

Investors Locked In Oil and Gold Profits in 2009

It was no surprise to see investors lock in some profits from the gold and oil markets as 2009 came to a close.

In fact, oil futures shed $10 a barrel during the first half of December, striking a low of $70.83 before almost retracing the entire move. Oil ended last year with an $8.50 run to close out the year at $79.36 - a gain of around 43% for the year.

As for gold, investors grabbed some major end-of-year profits, too, shaving the "yellow metal's" price $130 per ounce in December. Still, the 2009 closing price of $1,095 represented a gain of about 26% for the year.

With 2010 now in full swing, the bottom-fishers and bullish participants have come back out to play, driving both of these markets right back up.

Here's what to expect.

Why Oil and Gold Will Head Higher ... And How to Profit From It

A look at the price action illustrates that the traders haven't hung around.

In the New Year's early going, the price of oil has rallied by $4 a barrel to reach a 15-month high of $83.50. Gold has bounced off its December lows and added $45 an ounce, bringing the price up to about $1,157 an ounce.

From this point on, I don't see any reason why oil and gold won't continue their bullish moves. Consider these two factors:

  • Inflation : We're likely to see inflation tick higher at some point in 2010 - a scenario that bodes well for both of these commodities, given that investors use them as hedges against higher prices.
  • Speculation : Over the past year or two, both oil and gold have gained massive momentum from speculation. Once a commodity market gets going, speculators (such as banks, hedge funds and large institutional traders) can drive the price considerably higher. This merely intensifies the move.

There are a few ways to participate in bullish moves...

  • Exchange-Traded Funds (ETF)s : The easiest, quickest and often most cost-effective way to invest in oil and gold is to buy one of their respective ETFs. ETFs trade just like stocks on the major exchanges and aim to track the price of the underlying commodity. For example, you can go for United States Oil Fund LP (NYSE: USO) or SPDR Gold Trust (NYSE: GLD) - playing the upside by either buying the shares outright, or through call options.
  • Futures Options Contracts : A more direct way to play the oil or gold market is through futures options contracts, which trade on the New York Mercantile Exchange (NYMEX) and COMEX, respectively. However, be sure to employ limited-risk investing strategies like credit spreads and give yourself a time horizon of at least three to six months with the options to protect yourself from price fluctuations along the way. The June 2010 contracts are very popular and liquid in both oil and gold.

Lastly, I want to highlight a commodity market that typically offers the best trading opportunities just once a year - during hurricane season - but which is facing a serious problem right now, too.

How Ice Could Heat Up Your Commodity Portfolio

It's been a brutal winter. Even Florida hasn't been immune to the nasty cold snap affecting much of the United States at the moment.

Despite the cold, however, orange-juice farmers in the so-called "Sunshine State" are sweating. The record low temperatures have the potential to hurt the orange crop.

The orange juice futures market has reacted to the lower crop yield scenario by scooting higher in recent weeks. But beware: While conventional wisdom might be to play a continued price rise, the rally could be for naught. So far, we haven't seen damage to the orange crop and a contrarian trade might be the best move here.

So if you're looking to buck the trend and play this potentially overheated market to the downside, a bearish trade could prove very profitable if the orange crop emerges relatively unscathed. I suggest you look into limited-risk put option strategies, specifically put option debit spreads, using May 2010 options. Futures options on orange juice trade on the ICE/NYBOT exchange (NYSE: ICE) in New York.

[Editor's Note: This article was originally published by Investment U - a free daily e-letter that provides economic insights, investment education, trading strategies and stock tips. Lee Lowell is the futures options and commodities specialist for Investment U and The White Cap Research Group. Having spent six years working as a market maker on the floor of the NYMEX, Lowell has developed investment strategies that produce enormous upside while also reducing risk. He's the founder and editor of The Instant Money Trader, which shows investors how to buy stocks at a discount and get paid for it. He's also author of the bestselling book, "Get Rich With Options: Four Winning Strategies Straight From the Exchange Floor."]

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