by Lee Lowell, Stock and Commodity Option Specialist
Tuesday, January 12, 2010: Issue #1173

“So what do you expect from the commodity markets in 2010?”

If I had a dollar for every time I’ve been asked this question over the past few weeks, I’d be able to buy myself an ounce of gold!

I’ll tell you what I’ve told my friends and colleagues: More of the same. Just because it’s a New Year doesn’t mean we should expect commodities to behave much differently than they did in 2009.

In my final Investment U column of 2009, I highlighted the crude oil and gold markets as the ones to watch as we head into this year. And neither has disappointed so far.

Although both have enjoyed impressive upward runs, they’re set to remain the key drivers within the commodities sector.

Here’s my latest analysis, along with some tips on how to profit…

Investors Locked In Oil and Gold Profits in 2009

It was no surprise to see investors lock in some profits from the gold and oil markets as 2009 came to a close.

In fact, oil futures shed $10 a barrel over the first half of December, striking a low of $70.83 before almost retracing the entire move. It ended 2009 with an $8.50 run to close out the year at $79.36 – a gain of around 43%.

As for gold, investors grabbed some major end-of-year profits here, too, sending the metal’s price down by $130 per ounce in December. Still, the 2009 closing price of $1,095 represented a gain of about 26% for the year.

But with 2010 now in full swing, the bottom-fishers and bullish participants have come back out to play, driving both of these markets right back up. Here’s what to expect…

Why Oil and Gold Will Head Higher… And How to Profit From It

As you can see from the charts below, traders haven’t hung around.

The price of oil has rallied by $4 to a 15-month high of $83.50, while gold has bounced off its December lows and added $45 an ounce to around $1,157.

From here, I don’t see any reason why oil and gold won’t continue their bullish moves. Consider these two factors…

• Inflation: We’re likely to see inflation tick higher at some point in 2010 – a scenario that bodes well for both commodities, as investors use them as hedges against higher prices.
• Speculation: Over the past year or two, both oil and gold have gained massive momentum from speculation. Once a commodity market gets going, speculators (such as banks, hedge funds, and large institutional traders) can drive the price considerably higher. This merely intensifies the move.

And there are a few ways to participate in bullish moves…

• ETFs: The easiest, quickest and often most cost-effective way to invest in oil and gold is to buy one of their respective ETFs (exchange-traded funds). They trade just like stocks on the major exchanges and aim to track the price of the underlying commodity. For example, you can go for United States Oil (NYSE: USO) or SPDR Gold Shares (NYSE: GLD) – playing the upside by either buying the shares outright, or through call options.
• Futures Options Contracts: A more direct way to play the oil or gold market is through futures options contracts, which trade on the NYMEX and COMEX, respectively. However, be sure to employ limited-risk investing strategies like credit spreads and give yourself a time horizon of at least three to six months with the options to protect yourself from price fluctuations along the way. The June 2010 contracts are very popular and liquid in both oil and gold.

Lastly, I want to highlight a commodity market that typically offers the best trading opportunities just once a year – during hurricane season – but which is facing a serious problem right now, too…

How Ice Could Heat Up Your Commodity Portfolio

Even Florida hasn’t been immune to the brutal cold snap affecting much of the United States at the moment.

But despite the cold, orange juice farmers in the state are sweating. The record low temperatures have the potential to hurt the orange crop.

The orange juice futures market has reacted to the lower crop yield scenario by scooting higher over the past two weeks. But beware: While conventional wisdom might be to play a continued price rise, the rally could be for naught. So far, we haven’t seen damage to the orange crop and a contrarian trade might be the best move here.

So if you’re looking to buck the trend and play this potentially overheated market to the downside, a bearish trade could prove very profitable if the orange crop emerges relatively unscathed. I suggest you look into limited-risk put option strategies, specifically put option debit spreads, using May 2010 options. Futures options on orange juice trade on the ICE/NYBOT exchange in New York.

Good trading,

Lee Lowell

View original at: Investment U

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