June 16, 2006 – The silver market experienced a rapid slide this week as fears of a slowing worldwide economy sent investors to the doors in a sharp round of long liquidation. Many investors have asked us for a reason for the drop.
The fact is, there is no fundamental reason silver dropped so fast. Like the rally that preceded it, the move downward in silver was a result of nervous investors closely monitoring daily reports and, more important, each other for clues as to which way the economy is headed. This is true in silver, gold, currencies and the S&P.
It is our opinion that, at least for the short term, fundamentals are irrelevant in the metals markets and prices are going to be reacting to every minor blurb the media produces on the economy. Fed Chairman Bernanke’s comments late last week were seen as encouraging regarding inflation, and the silver market managed to post a mild recovery by week’s end. However, stand aside for now until silver starts following its fundamentals a little closer. Those following silver should look to the copper market for direction as this industrial metal has tended to lead the complex higher and lower.
Live CattleNegotiations to open South Korea to U.S. beef imports are nearing an end and a deal is expected shortly. Japan held the last of their public meetings this week on the subject of U.S. beef safety and most expect a decision to be close at hand. Slaughter this week came in at 126,000 head, which was at the high end of expectations, supporting the argument that higher summer demand is materializing. The burst higher in cattle futures this week was impressive (chart).
The only thing surprising was that the market took so long to do so. The opening of the Japanese and South Korean borders would almost immediately increase demand for U.S. beef by nearly 8%. While some feel this increase is partially priced into the market, we feel that a full resumption of exports to these nations would mean cattle prices adjusting back upwards of the 85.00-86.00 range (basis August Live Cattle) to account for the increased demand. Puts sold earlier this month are performing well and we would see any price weakness next week as opportunities for adding to the position.
Natural gasNatural gas is another commodity that made impressive gains this week as expectations of extreme heat in the United States in the next two weeks spooked the shorts and set off a short-covering rally (chart). Longer range projections are predicting a pattern of extreme heat this summer. While natural gas supplies remain hefty at 2397 billion cubic feet (bcf), 451 bcf more than last year, a few weeks of hot temperatures could draw supplies down and drive prices moderately-to-significantly higher. Natural gas can be an emotionally driven market. Prices get their share of press coverage and it is a favorite market of small specs who like to buy on news stories.
The first named storm of the year in the Gulf of Mexico rolled through this week and although it had little impact on natural gas production, it served to remind everybody of what is ahead in the coming months. Our opinion is natural gas has put in a seasonal low. In the near term, adequate supplies will mean the market needs news to keep it moving higher. However, as we’ve been stating in this column for weeks, we feel gas was at a value near 6.00 and feel the market will have trouble trading below that level as the U.S. summer begins in earnest.
James Cordier & Michael GrossLiberty Trading Groupwww.optionsellers.com (800) 346-1949 Office@libertytradinggroup.com
*The information in this article has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed. Use it at your own risk. There is risk of loss in all trading. Past performance is not necessarily indicative of future results. Traders should read The Option Disclosure Statement before trading options and should understand the risks in option trading, including the fact that any time an option is sold, there is an unlimited risk of loss, and when an option is purchased, the entire premium is at risk. In addition, any time an option is purchased or sold, transaction costs including brokerage and exchange fees are at risk. No representation is made that any account is likely to achieve profits or losses similar to those shown, or in any amount. An account may experience different results depending on factors such as timing of trades and account size. Before trading, one should be aware that with the potential for profits, there is also potential for losses, which may be very large. All opinions expressed are current opinions and are subject to change without notice.
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