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James Mound's Weekend Commodities Review for April 4th, 2011

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The Weekend Commodities Review


Is $4 a gallon gasoline enough to stop you from driving your car?


How about $40/gallon?


How about $400/gallon?


How about $40,000/gallon?


When would you think about carpooling or taking the bus or train to work? When would you buy a Prius or quit your job for one that allows you to telecommute? When does a plane ticket get too expensive to take that vacation with your family?


The reality is that commodity price is based on supply and demand, but often overlooked is that supply and demand is also affected by price. This is especially apparent when prices hit extremes like the examples below. These extremes can often cause dramatic cycle shifts in the supply and/or demand structure of a commodity.


Here are some examples: Crude oil hit $11 then never looked back as it ran to the highest price on record of $147 a barrel. From there it was so stretched to the opposite extreme that the same type of thing happened on the way back down – to $35. Rice reached epic price levels in 2008 as a global grain shortage sparked a massive panic, more than doubling the price of rice in a matter of months. That price peak lasted only a moment as supplies hit and the panic eased, helped by a global credit crisis and economic meltdown. Cotton hit one of the lowest levels in history, nearly 40 cents, before a global subsidy effort stabilized prices and began a cyclical supply shift that helped rally cotton to over $2.10 - the highest recorded price for cotton in the history of the futures contract. The coffee market is also no stranger to this cyclical price expansion; as it has been below $.50 only a few times in its futures contract’s history and each time rebounding to more than $2 pricing.


A good example of price affecting demand is the frequent talk of $4 gasoline prices at the pumps in the United States being a demand-shifting price point. While there is limited evidence that $4 is some magical price point, it is important that the market analyzes when demand may shift due to price. Equally important is to identify when a market may be able to produce more to offset the demand spike or supply shortage that caused a major price spike. This supply input can just as easily cause a major cycle shift in a market. The point is that cycles in commodities can and do occur because of price extremes, and whether it is $4/gallon for gasoline or $4,000/gallon for gasoline there comes a point in which demand changes because a commodity is too expensive. There also comes a point in which producers find ways to supply more because of high prices.


On Tuesday I will be releasing a report that identifies three markets that I believe are simultaneously hitting cycle shift highs and I feel are set to collapse during the 2nd quarter of 2011. Hint: One or more of these three markets begins with the letter C…can you guess what one (or more) of them are? In the report I will go over why these markets are at a turning point and specifically how to trade them. I also include a 2011 grain market outlook, commodity wall calendar, and a third special bonus gift. Order before midnight Tuesday to get half-off on pre-production ‘early bird’ pricing. Click here for the details.


There is risk of loss in all commodities trading. Please consult a broker before you trade for the first time. Losses can exceed your account size and/or margin requirements. Commodities trading can be extremely risky and is not for everyone. Educate yourself on the risks and rewards of such investing prior to trading. Fundamental factors, seasonal and weather trends, daily news, and other current events may have already been factored into the markets. Strategies using combinations of positions such as spreads and straddles are no less risky than taking straight long or short futures or options positions. It is important to note that options and futures markets are separate and distinct and do not necessarily respond in the same way to similar market conditions. Option prices do not move in lockstep with changes in the underlying futures market price.


*Disclaimer: There is risk of loss in all commodities trading. Losses can exceed your account size and/or margin requirements. Commodities trading can be extremely risky and is not for everyone. Some option strategies have unlimited risk. Educate yourself on the risks and rewards of such investing prior to trading. Past Performance is not indicative of future results. Information provided is compiled by sources believed to be reliable. JMTG or its principals assume no responsibility for any errors or omissions as the information may not be complete or events may have been cancelled or rescheduled. Options do not necessarily move in lock step with the underlying futures movement. Any copy, reprint, broadcast or distribution of this report of any kind is prohibited without the express written consent of James Mound Trading Group LLC.

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