Wider ranges and more volatility can be expected in the coming months according to experts speaking at the Dow Jones Indexes annual mid-year commodity outlook held at the Chicago Board of Trade grain floor Tuesday morning.
Charles Nedoss, senior account manager for Peak Trading Group, said to expect higher gold prices regardless of whether you view the current economic environment as inflationary or deflationary. He says gold will work as a hedge against inflation or as a store of value in a deflationary environment.
Nedoss says that the ratio of gold to crude oil has historically been around 17.2 barrels of crude per 1 oz of gold. Right now it is roughly 7.55 barrels to 1 oz of gold. “Gold is undervalued relative to crude,” Nedoss says, and although crude may have a ways to go in this correction, that still leaves plenty of upside for gold. Nedoss expects gold to trade in a wide range in upcoming months and pegs the near-term low at $850 per oz with a topside target of $1,200. “It will be driven by crude, the dollar and geopolitical concerns,” Nedoss says.
Speaking of crude oil, Phil Flynn, Alaron energy analyst and a consistent energy bull over the last decade, believes that for the first time in many years the price of crude may have hit a top and next year’s high will not exceed the current year’s high.
While in the past Flynn has pointed to global economic growth and demand pushing oil higher, he says, the near doubling of crude prices from last October when the Federal Reserve cut interest rate by 50 basis points had a different dynamic. “[People] bough oil as a hedge against systemic risk. [They were] buying oil as a currency of last resort.”
Flynn expects crude to dip back below $100 this year and that consumers could see $3 dollar gas at the pump.
David Hightower, president and founder of the Hightower Report, says that the we are in a period where investors are switching to hard commodity assets and expects that trend to continue. He joked that various pundits have cited 10 commodity bubble bursting events in recent years; he is not one of them. “We don’t see the factors that bring about a market top,” Hightower said. “We don’t have high enough prices…we have to move to higher prices, demand has not been pushed back.”
Hightower expects corn to trade between $5.50 and $8 in the near-term; wheat to trade between $7.50 and $10 and soybeans to trade between $13 and $16. Each of those highs could be extended if there is a major weather event before the end of the growing season. He says there are two things that could cause a major top in grains, “an economic collapse and a reduction in demand.”
All the analysts saw Congressional proposals to limit investments in commodities as negative and counter productive. Flynn said such a move could be dangerous and lead to gas lines and moving markets overseas.
Hightower said restriction on investing in commodities “would make shortages more acute in the future.” He added, “Stopping speculation would not stop China from eating or make India go back 25 years.
Nedoss noted that the Minneapolis Grain Exchange (MGEX) corn and wheat indexes, which are financially settled and tend to track the cash market, have been correlating closely with the CBOT grain complex. That is an indication that the market forces are the driver of grain prices not over speculation, according to Nedoss.
John Prestbo, editor and executive director of Dow Jones Indexes said of the proposals to restrict commodity investing, “I am an optimist; I am hopeful that cooler heads will prevail.”
