Gann Global Financial

One of the things that I have pointed out over time is our historic database as far as commodities, I believe, is second to none.  Gann Global Financial possesses a database of daily commodity prices that in many cases go back to the early 1800s.

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Historic Commodity Deflationary Declines

Using the Research Engine, we are able to look at the various historic precedents of historic deflations similar to what we have seen in our market; however, given that this has been the greatest commodity decline in history, and the fact that there is variability on how previous historic deflationary declines occurred, it is important to note that the 200 year history, while it seems like a long period of time, does not give us many reference points since we are looking at something and dealing with something that we have really only seen a handful of times in history.

We do have some limitation, and I say that to maintain a sober outlook in the market. I want to make sure that when I make recommendations to you that it is based upon probabilities; it is based upon history repeating. There are times when we are simply lost in the markets, and I don’t view that as a negative in any way because it doesn’t make any difference what we think in the markets until we commit money. At the point at which a forecast converges with our trading signals, that is the point at which we commit money. We are in this to make money, not to be right in the markets.

Projections for Overall Commodities – Goldman Sachs – Commodity Index

With respect to what is taking place, we are going to be looking at the chart in the Goldman Sachs again, which is this chart (see video), and make a couple of observations.

We had overlaid what took place after the great deflationary declines in 1974, 1979, 1920, and 1980. In 1980, the initial liquidation, the major waterfall liquidation was followed by a bear market rally and a resumption of the bear market. This was also true of both the 1815 market and the 1864 deflation after the Civil War. There were three instances when declines similar to this, and there have only been six in history, so this is the seventh-when declines of this magnitude resulted in bear market rallies like occurred in 1980 and then resumption of the bear markets.

Now three other of the waterfall declines were followed by culmination points and bull markets. That occurred in 1974, 1949, and 1920. I am at this point aligning myself to the belief that we are going to be following a pattern where we’ve probably got a culmination in final low in overall commodity prices, and we are in the midst of what will be a first leg up in an overall long term bull market. You can see (see video) that in 1949, our most important cycle, the 60-year cycle, the retracement of the preceding decline initially was rather modest. After that first leg up there was a correction, and then the market moved to a new high and then continued up in a bull market.

There is an observation that I do want to make with respect to this, particularly the geometry of markets like this.  I would say the decline after the July 2, 2008 high is the equivalent of a nuclear bomb going off in the financial markets. The markets are catching their breath. That is what I believe is taking place right now. A tremendous amount of wealth destruction occurred, and the markets have to digest all that is taking place in the economy. No one has a perfect prescience as far as what is taking place, and so there is a lot of guesswork being done.

Writing Options: A Strategy in Response to Volatility Premiums

That is why conditions are choppy and why I still view this environment as ideal for strategic writing of options. I believe that we are in a trading environment. This was a huge historic downtrend leg down in overall commodity prices, and what we know from history is that typically we can see a move like this and yes, there is the law of action and reaction where there could be a violent reaction to a move down like that, but then the markets tend to, over time, slow down and quiet down.

By virtue of the volatility that we have had in the market, option premiums have been very high, and we have a premium advisory service called The Strategist where we have actually been writing call options. We have been selling options in the S&P, selling options in the silver, and that has been working out very well because the option premiums are so high because the fear factor in volatility premiums, which are eroding because of basically trading range conditions, and the time factor in the options is working in that favor. It just so happens to be a season where, I believe, option writing may be the preferred strategy, one of the best strategies. It is certainly not as exciting from the standpoint of risk – reward as other strategies in the market, but it is very valid, and it is one that we are utilizing in The Strategist service.

Commodity Market Trend Continues to Point Higher

That being said, in terms of expectation as far for commodities, at this point in time we do believe that the trend is going to be up, but the carrying charge premiums are really high, so that diminishes rates of return on potential longs in many of the commodities, particularly in the energy complex. That diminishes rates of return, so there are certain factors that in a sense inhibit the ability for the markets to move significantly and yield high rates of return; I should say multiples of risk reward.

We want to obviously be approaching the market with the right mindset based upon where the market is historically, and so I believe we are in more of a trading type situation and will continue to be so.