All that Glitters--and Gurgles

April 16, 2012 02:51 AM

Gold and crude oil are key markets for insight into grain prices

It’s a real gamble to predict the direction of the grain markets, since at any point, a multitude of factors can support or crash them. To help make informed marketing decisions, keep an eye on two key raw commodities: gold and crude.

Gold and crude oil can be classified as bellwether commodities, or leading indicators of future trends, says Mike Hogan, director of Market360, Stewart-Peterson Inc.’s grain and dairy consulting service. "If you watch gold or crude, it tells you where the whole complex is going," he says.

Jim Wyckoff, owner of Jim Wyckoff on the Markets, an analytical and trading advisory service, says crude oil is the big brother in the commodity sector and leads other commodities, but gold is a close second.

He says these two major raw commodities are sector leaders, trade similarly and greatly influence the grain markets.

"On a day when gold is sharply higher, you’re probably going to see crude oil sharply higher. When those two markets are sharply higher, you’ll probably see at least under-lying support for the corn market," Wyckoff says.

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Of course, this doesn’t happen every day. But, he says, it happens enough that a general trend and degree of correlation has emerged in the past several years.

The Investing Cycle. The current loose monetary policies of the U.S. Fed and the world’s major central banks have provided support for the gold market.

"It’s kind of a kick-the-can type of governance," Hogan says. "We run these large deficits and we want to deal with them, but we want to do it down the road. As long as that methodology is in place, gold will probably find itself in a bullish seat." If these monetary policies are changed, he says, gold will likely fall apart and the U.S. dollar will rally.

Wyckoff says that the investing marketplace tends to swing between hard assets and paper assets, as commodities and stocks have a negative correlation.

"In the 1990s, up until 2000, the paper assets were king and everyone was investing in the stock market."

Then, the stock market went bust and the pendulum began to swing back toward hard assets. Everyone started buying gold and other commodities, resulting in record-high price rallies, Wyckoff says.

Because of inflation fears and the loose global monetary policies in place, the major focus now is on the hard assets.

Since commodity prices can rise even during an economic downturn, investors outside of the agricultural arena are buying into the grain market, Wyckoff says.

"Physical assets like the commodities and gold tend to see their prices rise during times of inflationary pressure," he says. "With the stagnation we’ve seen in the stock market in the last 10 years, we’ve seen a keener interest in other assets, like the commodity markets."

Hogan says this type of cycle tends to last around two decades. "Every 17 to 21 years, commodities will take the bull by the horns and lead the economy forward. Then for the next 17 to 21 years, it will turn back over to the equities."

For the last 10 years or so, grain, crude and gold have all trended higher. Hogan says this pattern will likely continue for several years, maybe until 2020. After that, he predicts, commodities will be more mundane.

Don't Discount the Dollar Index

The U.S. Dollar Index, which measures the value of the U.S. dollar relative to six major world currencies, is another key market chart to watch. Jim Wyckoff, owner of an analytical and trading advisory service, says this index is a good barometer of the overall health of the U.S. currency and is also important because most of the world’s commodities are priced in U.S. dollars.

The U.S. Dollar Index trades in an inverse relationship from gold and other commodities. "If gold is going up and the dollar is generally lower, that spells good times for farmers. If it’s the opposite, that’s where you need to watch out," says Mike Hogan, director of Stewart-Peterson Inc.’s Market360.

A weaker dollar is bullish for the grain market, as U.S. grains are cheaper to buy, Wyckoff adds.

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