May 18, 2006

Power up your currency and energy trading with Sterling Smith's FuturesOne Power Index!

Learn how to better understand major player's role in the marketplace with FuturesOne Power Index reports. Receive these exclusive weekly reports with proprietary FuturesOne Analysis. Gain insight on market direction with your complimentary 3 month subscription to the FuturesOne Power Index. Sign up today!

Today's Questions:

First, I would like to thank everyone for giving me such an outstanding group of questions.

Sarbjit from India asks
Sir, I would like to know what is the combination of indicators that work accurately, in every market and in any time frame, for getting the exact entry and exit levels.

Dear Sarbjit, that indicator is a very special one, called a crystal ball. I have the deluxe model that plugs into the wall. Seriously, no group or any one indicator is going to ever be 100 pct accurate all the time. The very nature and necessity of the marketplace makes it an impossibility to have something like a "Holy Grail." Good discipline and proper risk management are the first steps in the long road to successful trading.

K.E. from the USA asks:
Do you put any value in Larry Williams' indicators (i.e., Commercials, Sentiment, and Seasonality & Open Interest) in determining the fundamentals of commodities? What charting serv. provides these?

Dear K.E.,
I did 24 seminars with Larry Williams from 1999 through 2001, and worked extensively with his students and his methodologies. Indicators are valuable tools, and I agree with many of his ideas and concepts. In designing things like my own FuturesOne Power Index, and OptionCapture I use some of Larry's basic tenets, and then combine them with some pretty serious option theory. Always remember indicators are tools, and used properly they can be of great service.

So yes, I do put value in those indicators.

Dave from Billings, Montana asks:
I have heard it said that the commercials are the experts. With that said, how is it and/or why is it that the commercials still hold tight to there massive short positions in the silver and gold markets in spite of a strong up trending market

Dear Dave,

This is a very good question, as it flies right in the face of a very solid market concept, which does, over time, hold water. To answer this question properly we need to first identify and explain who the major market participants are.

The commercials are in the broadest sense defined as entities who can take or make delivery, or have price risk associated with their business. A good example of this would be an oil company and an airline. These are major players who in many ways are the market.
The next largest group is the large speculators, or the funds. They are here to make money. The last group is the non reportables; these are independent traders, and small hedgers.

The key point about the metals, especially gold and silver is that they are dual purpose commodities, yes they have industrial uses, but they are also precious metals, or a form of currency. Now let's look at who the commercials are in the gold. The most obvious one are mines. These are the participants who are ordinarily short. They are interested in locking in good prices, and yes they find these prices to be very tasty. So now we know the short side of the story.

The long side requires a little more digging. Picture a large commodity fund that trades 80 different markets globally. Now let's think about the uses of gold, while there is some very limited use in manufacturing and jewelry its real uses are elsewhere.

The largest use of gold though, is as an investment, and as a hedge against currency risk, inflation, and a host of other woes. So the real "commercial" use of gold is by whom? Entities who are not listed as traditional commercials, but moreover, the large speculator category.
Gold, and silver to a lesser degree are unique in that their primary commercial application isn't "consumption" per se (like corn) but speculation. This is why the COT reports for the gold need to be looked at differently from most things.

Power up your currency and energy trading with Sterling Smith's FuturesOne Power Index!

Learn how to better understand major player's role in the marketplace with FuturesOne Power Index reports. Receive these exclusive weekly reports with proprietary FuturesOne Analysis. Gain insight on market direction with your complimentary 3 month subscription to the FuturesOne Power Index. Sign up today!

Rodolfo from Florida asks:
If the future transportation fuel is ethanol, why corn as the raw material to produce it, is not going up steadily as copper, gold and silver are doing?

Dear Rodolfo,
The best example of the use of ethanol is in Brazil, and the price action in the sugar market. Sugar from February 2005 to February of 2006 basically doubled in price. Also, the players in the market changed. The funds were the early buyers of sugar, and held a massive amount of the open interest. Now that prices have found a new area, the commercial participation has grown greatly.

Seeing the same sort of behavior for corn, over time would not surprise me. Seeing the same thing for soybean oil is a very real possibility. Corn is different from metals, as it is grown globally as crop, and is renewable, so its price action won?t be as active from this until demand really starts to heat up.

Larry from Illinois asks:
I own and manage apartments and pay for the heat. Is there a "safe" way for me to hedge the cost of natural gas? Each year I see it bottom in May and peak in Dec or Jan. What is your recommendation?

Dear Larry,
Call options or call spreads would be the safest choice here. A broker who is knowledgeable with hedging and who is willing to sit down with you for a little bit and get to know your needs should be able to help you. You may contact me, as I do work in those areas.

Hedging with Futures/Options can have uses well beyond the traditional thoughts of farmers and grain production. If your business has any type of price/currency/raw material risk there may be solutions to help offset these risks.

Louis, from NYC asks,
I have a substantial percentage of my assets in precious metal mining shares as well as physical gold. Needless to say I have done very well. But, I am greedy, (and I think the metals bull is just beginning to snort), and I would like to do some leveraging. While I have been investing most of my life, I know very little about options. Could you suggest a specific investment strategy for the metals, and can you recommend a knowledgeable broker?Can you suggest some easy to understand material on options?

Dear Louis, I have material readily available for you about options and how to use them, and can show you specific strategies, and tailor them to your risk parameters.

Always remember that markets go both up and down, and when you are heavily invested in any one area, you expose yourself to undue risk. A good broker will show you how to help lay off some of that exposure to help your overall bottom line, as well as way to enhance performance.

REPRODUCTION OR REBROADCAST OF ANY PORTION OF THIS INFORMATION IS STRICTLY PROHIBITED WITHOUT THE WRITTEN PERMISSION OF FUTURESONE AND STERLING J SMITH. THE INFORMATION REFLECTED HEREIN IS DERIVED FROM SOURCES BELIEVED TO BE RELIABLE; HOWEVER, THIS INFORMATION IS NOT ASSURED AS TO ITS ACCURACY OR COMPLETENESS. OPINIONS EXPRESSED ARE SUBJECT TO CHANGE WITHOUT NOTICE. THIS MATERIAL AND ANY VIEW EXPRESSED HEREIN ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED IN ANY WAY AS AN INDUCEMENT TO BUY OR SELL COMMODITY FUTURES OR OPTIONS CONTRACTS. FUTURESONE AND ITS OFFICERS, DIRECTORS, EMPLOYEES AND AFFILIATES MAY TAKE POSITIONS FOR THEIR OWN ACCOUNTS IN CONTRACTS REFERRED TO HEREIN. TRADING FUTURES INVOLVES RISK OF LOSS. DO NOT DUPLICATE.

This publication is strictly the opinion of its writer and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is obtained from sources believed to be reliable, but is in no way assured. No assurance of any kind is implied or possible where projections of future conditions are attempted.

Futures and options trading involve risk. The valuation of futures and options may fluctuate, and as a result, clients may lose more than losses can or will be limited in any manner whatsoever. Past results are no indication of future performance their original investment. In no event should the content of this market letter be construed as an express or an implied promise, assurance or implication by or from FuturesOne or Sterling J Smith.

Power up your currency and energy trading with Sterling Smith's FuturesOne Power Index!

Learn how to better understand major player's role in the marketplace with FuturesOne Power Index reports. Receive these exclusive weekly reports with proprietary FuturesOne Analysis. Gain insight on market direction with your complimentary 3 month subscription to the FuturesOne Power Index. Sign up today!