Commodity Trading Companies are Increasing Their Bullish Bets on Commodities
This is all good news for China which is dependent on the status of the world economy and the U.S. If there is confidence in China there will be an increase in most commodity prices as they are now the largest consumer of coal, copper, and cotton. According to the commodity futures trading commission speculators increased their net long positions by 9.8 percent which is the biggest gain since August.
According to some money managers China is the most important factor because they are becoming the largest consumer of a number of commodities as they increase production to meet world demand for their inexpensive products. However, you cannot forget that China is dependent on other countries' economic growth such as European nations and the U.S. In retrospect Europe and the U.S are the main drivers of increased commodity prices as they fuel the economic engine of China.
Why do hedge funds and other commodity trading companies believe we are going to have an increase in the prices of commodities? Could it be because of China or confidence in the Federal government to avert a disastrous fiscal cliff? I believe it is both. China is now under new leadership which is giving confidence to investors that they will improve their financial climate.
According to a survey by Bloomberg the world economy is in the best shape it has been for 18 months. A commodity strategy that could benefit a speculator would be following the prices of hard commodities such as copper which is used in manufacturing, along with cotton which is used to make clothing. They should also pay close attention to energy such as oil and coal, the largest sources in the U.S and China. This commodity strategy will be directly affected by the economic conditions in the U.S, China, and Europe.
Other markets to be traded based on economic growth but not specific to just growth are interest rates. A trader could also trade the stock indices but they are U.S stocks and may not be directly correlated to economic growth in China. A futures strategy that is bullish on these commodities would be going long by either buying futures contracts or options on futures contracts. Both have different risk and reward scenarios and should be chosen based on a traders risk tolerance. Another futures strategy would be trading spreads. A trader can enter a spread trade with either futures or options.
A futures spread can be done by buying and selling futures contracts on different commodities or different months. An option spread can be done by selling and buying options, calls or puts, at different strike prices. These types of trades are considered to be less risky but also tend to have a smaller amount of profit for the trader. Money managers and traders are expecting a rise in commodity prices in 2013 due to signs of economic growth in the U.S and China but do not expect enormous gains. There are other factors that drive commodity prices such as supply side factors. Traders need to examine both options.
