Cash in on this commodity’s coming price spike

Here’s an FT front page story in the making. But not for a while – so I’ll tell you about it first.

My friend Jack won’t leave it alone. He calls me about it once a fortnight at least. He keeps telling me about the “blow-off top” that’s coming in one hardly-ever-mentioned market. Says it’s going to make gold’s move through the $1,000 level look like a goose bump on my forearm…

Why this conspiracy can’t keep the price down for long

I have to say, his idea is full of intrigue. Jack reckons there’s some kind of manipulation going on. That’s what’s keeping a lid on this market. But he says these guys can’t go on suppressing the price. And when they give up, the price of this market’s “going to the moon”. If he’s right, there’s money to be made.

It’s not a long-term trade, this one. Jack’s idea is that it could be all over by March/April time. By that time, the smart money will be out, he reckons.

We’ll get to what this market is in a minute. But first, you need to know what a “blow-off top” is. It’s important to understand the nature of the beast. That’s because, as the name kind of suggests, these price patterns can be pretty dangerous.

Basically, “blow-off tops” are the end of a prolonged uptrend, resulting in a huge price spike. They’re basically caused by a huge buying frenzy. It’s quick and powerful. And when it’s done, the price is likely to plummet.

So the trick if you’re going to get involved in things like this is not to try and catch the exact top. Take a chunk out of the move and get the hell out.

The market my friend Jack is heading for a “blow-off top” is sugar.

As we can see from the chart here, sugar is in a prolonged up-trend.

There have been some pullbacks along the way. But that’s what markets do. The trend is undeniably up.

So why does Jack think there’s going to be an acceleration leading to a “buying frenzy”? Let’s take a look.

To start with, in January the price of sugar futures contracts hit the highest level in almost 30 years.

The price more than doubled in 2009 due to bad weather. Too much rain in Brazil and not enough in India smashed sugar cane output. India is the world’s top consumer of sugar. The drought there was so severe they’ve had to buy sugar to make up for the huge supply deficit.

That’s the background. The price certainly wobbled in the last few weeks as the whole Greece/Europe debacle rocked all risk asset markets.

But the bottom line is that sugar prices are heading up. Experts agree. This from Bloomberg:

“The sugar market being in a deficit, it’s going to outperform a lot of the softs,” said Adam Klopfenstein, a senior market strategist at MF Global. “There’s a lot of capital coming into the marketplace. You’re seeing risk tolerance back in vogue.”

And the fundamentals point to higher prices after the summer, too.

Sean Diffley, former head of trading at one of the world’s biggest sugar trading firms, said: “As we enter the second quarter, we enter the inter-crop period for South Brazil when export supply is minimal. Countries like Russia will return to the market in force. The acutest part of the deficit may not be apparent until the third quarter.”

Diffley reckons the world stocks-to-use ratio for sugar should reach 20-year lows in the second half of this year. And by that time, hot money will have been pouring into the market driving prices higher.

Now for the conspiracy theory that could send this market into overdrive…

The thing that my friend Jack has been going on about is what’s happening in the futures market. He reckons there is one reason the price of sugar is not even higher than it is now. It’s because the ICE trading exchange cancelled the higher-priced futures contracts at the last moment. He sent me an item from Bloomberg that supports that…

“ICE earlier cancelled all trades in the March 2010 contract above 28.9 cents a pound between 4:41 a.m. and 4:43 a.m. New York time, the exchange said in a notice sent to clients and obtained by Bloomberg.”

They can’t keep doing this though and pressure is building-up for a sharp spike. Jack expects the price of sugar to peak some time between late March and May.

The price has been trending up for the past year or more. Now, with supply threats coming to a head, and with the appetite for risk returning to capital markets, sugar could be about to enter a “blow-off top” pattern. If we get that, then the recent 29 cents could look cheap.

And the two ETFs that Jack has been trading will probably follow suit. One is from ETF Securities and is listed in London under the ticker: SUGA. The other trades in New York under the ticker: SGG.

I’ll be following this idea of Jack’s carefully – and looking for that legendary “blow-off top”.

This article

was written by Frank Hemsley and was first published in the free daily investment email
The Right Side

on 12 February 2010.

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