Tuesday, August 19, 2008

Oil Shorts Covered, Go Long Gold & Oil

When did I become a commodities trader? Unlike most commodity traders, I do not trade the volatility or very short term trades. I tend to look at sentiment and momentum and compare that with the "noise" in the market place, all the time assessing the underlying fundamentals.

The first short position on oil was at US$139, the double up position was taken at US$119.90. The shorts were covered at US$112.90. I initially was waiting for US$110 to be broken.

My reasons for covering:

a) The open interest on oil futures was only about 43% when oil was at US$130, now its closer to 70% and mostly on the short side. The hedge funds and index speculators were not only unwinding and deleveraging, but taking the short side as well in most commodities. The fact was much clearer in gold price movements over the last 2 weeks.

b) Despite the cumulative shorts, the momentum does not seem strong at all to push to test the US$110. If things don't look likely, it will move the other way.

c) The US PPI though a lagging indicator is worth considering. It was pretty significant and may take a few more months to ease down.

d) I still hold to the strategy that the upcycle in commodities is still intact. Though we may not test the highs again this year, it will at least gain back some significant ground.

e) My final conviction came from gold price which broke US$800 too easily but almost as quickly retestes the US$800 on the upside. Its been down below that level again. Its a good sign of price movements in an oversold instrument.

f) I was a bit surprised that the Russian-Georgia issue did not prompt a strong rebound, again lending weight to the strong shorts momentum. Now that the selling did not look likely to break US$110 on the downside, more sober minds would dictate that the Russia-Georgia thing is mostly about controlling a very major oil pipeline.

Link to previous trades:


New positions

Long oil futures $113.20
Long gold futures $802

p/s photos: Amanda S (aka Amanda Strang)


Anonymous said...

The lesson to be learned from commodity trading is the party can stop anytime. Make your money and run is my philosophy.

You can't go wrong with going long on oil BUT I am not sure you will get it right this time around. I say just get out of commodities all together. For short term trade, I would short volatility of oil and gold...

Anonymous said...

hi dali,

I have read your earlier article on oil and your prediction proven to be correct. But unfortutnately, i do not have the proper channel to short the oil thus cannot make any $ out of it.

Your article on Perwaja give me a chance to make a massive gamble and I bet all my savings on it. But...... sad very sad. Losing more than RM500 per lot.

So what should i do now? Pls advice.
(I don't wish to jump from the Twin Tower)
PS I am not blaming you, Just your advice. Thanks

Datuk said...

In my opinion, you will be incurred a big loss if you are adopting a long position in oil and gold comodities as the bubble will be bursting soon.

It's inevitable as fundamentally there is no shortage in both comodities. The bull was driven by the speculation. The euphoria and the dancing will be stopped by the collapse of demand as a result of lower in household disposible income.

The steep down in prices will induce the panic and herd mentality........

You will be in naked position if you don't adopting a stop loss approach when you are in long position this time around..

My point of view is oil will be below US 100 and gold will be below US700 one month after the end of Beijing game..

Henry said...

Same view as you. When everyone thinks oil is going down, it will go up. In fact I think it will go above USD200 per barrel this time. Just watch it. We may pay RM3.50 per litre next year. The charts already is showing gold can go back up.


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