Forget the Fed: Softs Markets Heating Up in Commodities
Good afternoon. This is James Cordier of OptionSellers.com with a market update for June 3rd. Later this year, we’re going to look back at the months of May and June. I think we’re going to see that we had quite a crescendo in option values as premiums have ballooned over the last 30 to 60 days, with much Fed talk trying to manipulate interest rates and manipulate the value of the dollar, and they’ve become very successful at this.
Over the last several weeks, Fed Reserve Janet Yellen has been talking about raising rates. Whether they do or whether they don’t, they’ve been very successful in increasing the value of the dollar. This hawkish talk has brought down several commodities; namely, precious metals, and we now have a hawkish stance priced into both gold and silver. The gold market rallied briskly earlier this year, up to 1,300, and we now lost 100,000 contracts in open interest as people piling in with dovish talk have now left the market. Gold recently tested the $1,200 level recently, over the last couple of days, and is trying to stabilize above that level. The silver market has come down nearly $1.50 on this hawkish talk, as well.
Should we have more dovish speech coming out of the Federal Reserve over the next month or two, we would have a fair value in gold and silver, quite a bit higher than where it is right now, but currently it’s fairly priced. A dovish conversation in June and July could cause the silver market to rally a dollar or two above the levels that it is right now. However, fair value is something that we’re always trying to consider, and supply and demand… we can’t get away from that.
Every time the Federal Reserve moves the market up or down, our precious metals certainly react to this. But at the end of the day, supply and demand rules the price. Gold and silver do have supply and demand factors. They don’t have currency factors constantly moving the market. At the end of the day, whether we have announced too much of gold or silver, the price goes down.
The other markets that we follow certainly are foods and energies. Those, quite often, are much more easily discernable as far as supply and demand goes. Some of the foods that we follow, coffee, for instance, has been doing extremely what we spoke of. The supplies right now, we think, are more than ample to go around. Both Vietnam and Brazil are producing a great deal of coffee, even though we had dry conditions in some of the Robusta areas in Brazil. We spoke of coffee for the last 6 months probably being depressed because of the high supplies worldwide. Lo and behold, prices are sitting near a 12-month low.
The sugar market right now is having some supply problems, and that price is now going up- it’s moving up towards 17 and 18 cents a pound. So often, we all get caught up with the daily ups and downs of the market. However, what we do is we want to trade supply and demand, and that is why we are able to sell options 6-12 months out. We avoid the noise and we simply want to trade supply and demand factors.
Also, what’s most interesting is that at the very beginning of the year we talked about orange juice, a seldomly traded commodity option by ourselves. However, we were talking about the supply of Florida orange juice being at a 50-year low. What has the price done? It has gone up. Today, we hit a new high for orange juice futures. Supply and demand is the way that the market is always going to react. The price is always priced fairly and that is how we sell options based accordingly.
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