I haven’t seen such high volatility in the gold market since I was a neophyte in this business, way back in 1979. Unfortunately, I knew little back then; now--unfortunately--I probably have too much information.

In mid-December I predicted a decent price correction (see CT, Dec. 12, 2005, Golden Opportunity or Golden Trap?). That prediction was on the mark, but a subsequent jump back into what is (possibly) the next leg up has not been as successful. This market is at a critical short-term juncture. As of Monday morning, gold was testing the mid-December futures high of $544.50 on the New York Mercantile Exchange. In Europe, the market reached $546 and was projected to open in New York around $543.

This is significant because even when gold makes a top, this animal (I mean mineral) has a habit of testing its high after the first break. Therefore, a failure from approximately this level--or even a few bucks higher--would be consistent with a short-term top in the precious metal. However, a confirmed breakout (and close) above this level could indicate the momentum necessary for another leg up. If it’s consistent with the previous leg, this points to the next objective of approximately $580.

Our longer-term bullish bias certainly hasn’t changed, due to the excess liquidity in the system and the dual problems of runaway budget and trade deficits. In the short run, though. we’ll let the market do the talking for us.

Watch the action in the next few trading sessions. Odds favor this week’s trend will point the way for the balance of the month. Once the trend is identified, I'll be trading it in my futures advisory service.

February 2006 Gold

www.commodity.com

Due to the bone-dry conditions in the winter wheat growing areas of Oklahoma and Texas, and with global supplies (in relation to usage) at 25-year lows, the fundamental outlook for Kansas City wheat appears quite bullish. A potential fly in the ointment, however, is the possibility this market is becoming too bullish too soon.

What I mean is the non-commercial players (also known as the large speculators) appear to be overloaded on the long side of the market. The most recent Commitment of Traders report indicates this group is long a huge 50,800 Kansas City wheat futures contracts, while being short a measly 3,712 contracts (for a net long position of 47,088). This is close to the all-time high net long number of 49,980, registered on Oct. 18, 2005.

When the non-commercial players--the speculators--get overloaded on the long side, history has shown the odds favor a cleansing correction. As you can see on the weekly chart below, that overloaded condition last October led to a 30 to 40 cent per bushel price break into the end of November. (Note this works in both directions; the market rallied 50 cents from the record net non-commercial short position last February.)

Just as the market gave back the short-covering rally gains early in the year (the bearish fundamentals at that time took over), in late 2005 the bullish fundamentals eventually took hold once again. From November and into early 2006, the market regained the total break. Still, it would most likely have been unprofitable--or at least unpleasant, from a margin call standpoint--to have held on during that break.

Weekly 2005 Kansas City Wheat

www.commodity.com

I expect to see an old-fashioned cleansing washout in the wheat market in the coming weeks--and it will end up being a buying opportunity. What about our Kansas City-Chicago wheat spread? I’m not concerned about it; in fact, it could even improve during a Kansas City break. The reason is the Chicago wheat fundamentals are bearish in comparison to the Kansas wheat fundamentals. Exports of soft red wheat (the low-protein Chicago wheat) are down by a whopping 50 percent against year-ago numbers. And the January 12 crop report will likely show a large increase in soft red (Chicago) wheat acreage for 2006.

Kansas City-Chicago October-December 2005 Wheat Spread

www.commodity.com

As anecdotal evidence, note how Kansas City wheat actually gained 15 cents in relation to Chicago wheat during the big break in wheat prices at the end of 2005. In other words, while Kansas City wheat broke hard, Chicago wheat broke harder, and the spread between the two improved. This scenario fits in well with our “Voice of the Tomb” seasonal wheat-trading program, and it’s telling us to go short Chicago wheat this week for a scalping trade.

© 2006 George Kleinman
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Futures and futures options can entail a high degree of risk and are not appropriate for all investors. Commodities Trends is strictly the opinion of its writer. Use it as a valuable tool, not the "Holy Grail." Any actions taken by readers are for their own account and risk. Information is obtained from sources believed reliable, but is in no way guaranteed. The author may have positions in the markets mentioned including at times positions contrary to the advice quoted herein. Opinions, market data and recommendations are subject to change at any time. Past Results Are Not Necessarily Indicative of Future Results.

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Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.