Buy commodities now, ask questions later

Their's is not to reason why just get in there and buy-buy-buy.

Commodity prices rocketed as fund money came plowing back in the futures markets. And I do not want to hear one person whine that speculators are driving the markets despite the so called bearish supply and demand fundamentals. The fundamentals are quite clear! If the economy gets worse, the Fed is going to print more money! If the economy gets better, well then, that is inflationary because supply will tighten driving prices up!

It is like a freaky two headed bullish coin or maybe even a coin with two bulls on it. Well at any rate, the bottom line is you can't fight the Fed. You see the proclamation by one Fed official James Bullard that the Federal Reserve should use aggressive quantitative easing if it needs to stimulate the economy further was all the commodity bulls needed to hear to jump into that all to happily familiar carry trade. You know where you sell the dollar, buy the euro and just about any commodity you can get you hand on, except for say the natural gas that acts as a nice hedge against your petroleum as it is less impacted by dollar fluctuations. In other words, get ready for some Fed inspired commodity price inflation. Forget the fact the Fed Chairman Ben Bernanke did not mention anything about further policy action or as I say, printing action. But let's face it, he did not have to. By him not denying it or scolding the Fed official that made the quantitative easing comments, it was almost like an endorsement. The truth is the markets are on notice! The Fed will not let the markets fail! Deflation fears will be fought with all weapons that are available. Even today the Wall Street Journal raised the specter of more Fed action as they report, "Federal Reserve officials will consider a modest but symbolically important change in the management of their massive securities portfolio when they meet next week to ponder an economy that seems to be losing momentum."

The issue: Whether to use cash the Fed receives when its mortgage-bond holdings mature to buy new mortgage or Treasury bonds, instead of allowing its portfolio to shrink gradually, as it is expected to do in the months ahead. Any change-only four months after the Fed ended its massive bond-buying program-would signal deepening concern about the economic outlook. If the Fed's forecast deteriorates significantly, it could also be a precursor to bigger efforts to pump money into the economy. Moving to stop the Fed's portfolio from shrinking would prevent monetary policy from slightly tightening in the face of a weakening recovery. The central bank's $2.3 trillion portfolio has nearly tripled in size since 2007. Whether the Fed makes any move next week depends in large part on economic data, particularly the government snapshot of the jobs market due Friday. Now do not get me wrong. This does not mean necessarily that we will go straight up but the bulls now have the Fed in their back pocket and we will see some wild swings as the markets tries to outguess Fed action and some deep corrections but if we see weak economic data and anemic demand numbers, that is not necessarily bullish.

Bad numbers and falling prices are what the Fed fears so they will keep oil and commodity prices from falling too far. Of course the storms in the Atlantic are coming into play as well. Tropical storm Colin looks like it will go up the East Coast and miss the sensitive Gulf of Mexico production areas. Still there is another tropical wave that has about a 20% chance of becoming a tropical cyclone which has a better chance to disrupt supply.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


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