COMMODITIES ESSENTIAL The resource for what matters

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1 COMMODITIES ESSENTIAL The resource for what matters Futures Forecast, p2 A mixed bag looking short on metals, neutral on grains, short on crude and long on nat gas. Main Article, p2thru4 Hedge funds are all over silver. Basically, funds haven t been doing so hot. It s no wonder hedge funds are closing up shop liquidations were up by 14% yoy in the first half. And fewer new funds are being launched. I came across a Bloomberg article today with more discussion on hedge funds and silver: Hedge funds are the most bullish on silver in seven months and investors holdings are expanding toward a record on speculation the metal will outperform gold as central banks seek to boost growth. Wagers on rising prices jumped 10-fold since June, U.S. Commodity Futures Trading Commission data show. I expect the hedge funds to be wrong on this... at least for the next few weeks. Silver has likely put in a short-term top. Trade Essentials, p4 No new recommendations or adjustments at this time. Positioning, p5 Two open positions: Long DTO and ZSL. 28 September 2012 ******

2 2 Hedge funds (and their high-water marks) are all over silver. Through the second quarter of this year, only 43% of hedge funds were able to clear their high-water mark. Meaning: their returns this year have been paltry and they re still trying to make up for last year s losses. That 43% figure is the lowest since record-keeping began nine years ago. On average, hedge funds are up 2.29 percent this year. Last year the average came in just shy of 9%. Commodity Futures 4-6 Week Forecast Last Price Direction Target Gold Short 1650 Silver Short 3000 Copper Short 360 Corn Neutral 750 Soybeans Neutral 1600 Wheat Long 950 Crude Oil Short 87 Natural Gas Long 3.6 Click on the hyperlink to view the audio/visual chart analysis. Bold denotes change from last week. Basically, funds haven t been doing so hot. It s no wonder hedge funds are closing up shop liquidations were up by 14% yoy in the first half. And fewer new funds are being launched. Now recall I recommended positioning in the ProShares UltraShort Silver Fund (ZSL) last Friday. Yesterday was a rough day for that position it gave back the quick gains made earlier in the week. Also remember the reasoning behind this ZSL position extreme bullishness by small and large speculators, i.e. hedge funds. From a contrarian perspective, this positioning indicates silver s rally is overextended, and a reversal should shakedown the price of silver. Then I came across a Bloomberg article today with more discussion on hedge funds and silver: Hedge funds are the most bullish on silver in seven months and investors holdings are expanding toward a record on speculation the metal will outperform gold as central banks seek to boost growth. Wagers on rising prices jumped 10-fold since June, U.S. Commodity Futures Trading Commission data show. I expect the hedge funds to be wrong on this... at least for the next few weeks. Silver has likely put in a short-term top. Copper Bulls Retreat on Concern Stimulus Not Enough That was a Bloomberg headline. But really: who ever thought stimulus for central banks, particularly the latest efforts, would be enough for commodity markets that are bogged down by slow global demand?

3 Amidst all the easing expectations and global economics predictions, copper has been one of two go-to indicators for how commodities might fare in the future. Despite near-term fluctuations, copper supply has always remained a concern. But now Barcalys is forecasting a copper surplus for the final quarter of the year. That would be the first (and only) surplus this year. Surplus is rarely a word used to describe the copper market. Consider then how inventory and supplies in China might influence the copper market. It was already believed that there is a substantial amount of copper being used as collateral for loans and sitting unaccounted for in Shanghai s bonded warehouses. And then remember the price majeure situation I spoke briefly of a few weeks ago. It explains: as prices for raw materials fall, it puts additional pressure on companies (particularly in China) who struggling to scrape by in an environment of excess capacity and sluggish demand. These companies are forced to dump this excess capacity in the market. This extra product then brings prices down further and applies even more pressure on the industry. Price majeure has been part of what s pushed iron ore companies and prices down mightily in recent months. I think the same goes for coal. Copper, however, hasn t exactly been subject to the same dynamic since supply and demand are relatively balanced. But copper companies certainly aren t out of the woods. Sumitomo Metal Mining Company is Japan s second-largest copper producer. They are forecast respectable increases in mine output and smelting capacity in They, and other companies in Japan, plan to turn to higher fees to compensate for the lower price they can get for a more plentiful supply. 3 Do corn prices rate today s pop? A USDA report today showed that corn stockpiles are lower than expected; the inventory numbers represent an eight-year low. The price of corn futures went limit-up, rising by nearly 6% today. But is that move warranted? I m trying to figure that out. We already know what the summer heat and drought did to crop yields. The lower-than-expected stockpiles left over from last year s crop, it is being said, are due to resilient demand. What s interesting is that dry weather has allowed farmers to harvest their corn far sooner than usual. Some analysts seem to think a bit of this 2012 crop has already been sold in place of leftover 2011 crop stockpiles. And with stockpiles still falling, this does in fact suggest resilient demand. I am very tempted to short this move today, using the Teucrium Corn Fund (CORN), thinking the general tone in the market will continue to weigh on the price of corn despite the bullishness in today s move.

4 4 But it may be a bit early to act. This news could stick and put a floor under the price of corn. In such an event, I m looking again to meat and food producers, processors and packagers. Names like Tyson Foods (TSN), Smithfield Foods (SFD), and Sanderson Farms (SAFM) have all bounced higher since early August when grain prices topped out. If today s USDA report does indeed put a floor under prices, it could sour the mood for these companies looking for some breathing room. These companies may represent good short opportunities, especially if the general mood for stocks remains negative and grain prices don t drop. He who hesitates has lost. I was considering making a recommendation to purchase the United States Natural Gas Fund (UNG) earlier this week. That would have been nice seeing as though yesterday UNG surged 9% higher! It s steadying off a bit today. I think is still has some room to move higher, but I want to be careful not to chase it after natural gas has risen 20% since the middle of last week. I think the $3.60 target still makes sense, as outlined several weeks ago. Look for a potential recommendation on UNG coming early next week. Eventually, though, I think natural gas prices will be capped... by coal. The winter may spark an increase in demand for natural gas. But any substantial increase in price will cause users to consider a shift into coal. Coal is trading at a discount to natural gas of about $1.25 per mmbtu. But it costs about $1 per mmbtu to ship coal. So whenever the spread between coal and natural gas is above $1, it makes some sense to consider using coal instead. This spread is likely to widen for a bit longer. Besides the upside potential for natural gas, demand for coal remains subdued in India and China. Trade Essentials. No new recommendations or adjustments at this time.

5 5 Positioning Position Date Ticker Direction Entry Stop Last Target Return PS Crude DoubleShort 9/21/2012 DTO Long TBD 1.63% PS UltraShort Silver 9/21/2012 ZSL Long TBD 0.30% Click on the hyperlink to view the audio/visual chart analysis. Bold denotes change. JR Crooks