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