Trader: Commodities

If you’re worried about inflation, buy commodities. Assets that you can actually touch tend to maintain their value better during inflationary times. But even though agricultural products are in the commodities sector, they may not offer such great protection.

While grains did well during the inflation of the 1970s, they enjoyed more muted success than, say, precious metals. Gold and silver production cannot be increased rapidly, giving the metals scarcity value. The same is not true of agricultural produce.

Today’s record high gold price is interpreted by some as evidence of a pending inflationary spurt. But this has not yet fed through to the price of many soft commodities. Corn, for example, fell by almost two thirds from its summer 2008 high and hit a three-year low in September.

Still, it is possible to make a bullish case for corn and other crops. World population is buoyant and increasingly wealthy consumers in emerging economies are lifting consumption. Also, falling real grain prices for much of the 1980s and 1990s discouraged investment in agriculture, creating the risk of new shortages.

Corn’s price has bounced since September, but its chart is far from appetising. It has failed three times to break decisively above its 21-month exponential moving average (EMA), currently at $402.90. It also faces a daunting barrier from the weekly Ichimoku cloud indicator, the bottom of which is at $396.

In fact, corn’s movements since 2006 have traced out what is potentially a gigantic topping pattern. If it now drops decisively, a revisit of its lows of $305.25 could be in order. Admittedly, the price has twice recently found support there, and the 200-month exponential moving average at $302.31 might also prove helpful. Were corn to drop through that zone, a strong target exists at $280. My Elliott-wave forecast suggests that it might head for $244-$232. By contrast, a determined monthly close above the 21-week EMA would turn me neutral, and a move above $450 would be bullish.