Trading commodities with fundamental news?

By: ispeculatornew
Date posted: 12.03.2008 (4:00 am) | Write a Comment  (0 Comments)

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The graph above, is a graph of the price of Gold, one of two prime examples to my point. Go back a year or two ago, and what were the two resources that made the news the most, gold and oil of course. They are traded in a variety of ways but both are usually seen as a way to trade macroeconomic and geopoliticals factors.

Oil has generally been seen as representatitve of the general state of the economy, so as the economy does well, demand for oil will increase and the price will go up and when the opposite happens, there will of course be demand destruction resulting in lower prices. Now of course there are other factors such as the output by OPEC, but that is what was generally seen. But then, the extreme movements of oil in the past 2 years have brought up a lot of different questions as specialists wonder what is causing all of these movements. A lot of accusations of market manipulation (by hedge funds, etc) have been brought up, even by regulatory organisations. And while the rise seemed difficult to justify, the recent decline is just as difficult to understand. Are we in a tough time for the world economy? Absolutely.. but the price going down over 60%.. really?

And then gold prices have acted even more strangely. A couple of years ago most specialists would have told us (and did!) that gold was the “refuge asset”, going up in times of uncertainty and down when the economy would suffer.

But then, look at the graph, what in the world happened? How did gold go down so drastically in recent months when it was the one resource that was supposed to rise in such circumstances? Sure, there are ample explanations such as the one that gold has an almost direct inverse relationship to the US dollar. And that might very well be the case. But it becomes very difficult to trade when every time gold or oil goes in a different direction, a new explanation comes out.

Is it possible that trading volume has gone up so much that the prices are driven mainly by hedge funds, fears and beliefs instead of actual ask and demand? It sure looks like we could spend a lot of time trying to figure out what is moving these markets. And perhaps more than anything, trend trading (to be discussed soon) might be the best way to trade these markets nowadays as their movements are discussed so much that a lot of investors are jumping on the bandwagon making the movements a lot more extreme than they should be.

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