One trend to go long, one to go short, and one sideways-trading commodity offer three ways to profit.
Commodities—goods as diverse as oil, timber, silver, nickel, and corn, among dozens of others—have been a quiet place to trade lately. With most investors looking at a stock market near all-time highs, commodities may provide investors with some different ways to make money.
Even better, looking at commodity trends, investors can find stocks capable of moving up or down more rapidly than traditional companies. We’ve identified three different commodities going through different trends, all where investors can profit.
Upward Commodity Trend: Natural Gas. This is a seasonal play on winter in North America and Europe. Natural gas demand spikes in the winter thanks to rising demand for the fuel for heating. Investors looking for a commodity trade can expect a market-beating move higher. Last year, natural gas prices spiked over 60 percent in total.
Buyer beware, however, this is a short-term trade. Natural gas production continues to increase thanks to fracking technology, and the longer-term trend for natural gas is down. A trader should look for an opportunity to get a 40-50 percent move higher before thinking about getting out of the trade and letting someone else take on the risk.
Among stock investments in the natural gas space, Apache Corp (APA), trades near 52-week lows, and with shares nearly cut in half from its highs near $40. However, during last year’s winter, shares rose over 40 percent from their lows. We expect a similar trend this time around. Investors who buy shares up to $22.50 will likely be able to sell in the low $30’s in the next few months.
Speculators who don’t mind the risk of a call option completely expiring on them may want to consider the April 2020 $30 calls, which last traded around $0.82, or $82 per contract. In a spiking natural gas environment, these could double or triple, but, again, as a short-term trend, don’t get too greedy and sell into strength.
Downward Commodity Trend: Gold. We like gold over the long-term for portfolio allocation and risk-reducing purposes. But after a strong rally this year, the price of the metal is likely to consolidate. That’s normal after any big rally, and gold hitting multi-year highs in 2019 fits the bill. With markets also looking at a possible end to trade fears, one big uncertainty going away also weighs against the metal right now.
Fortunately, markets can be traded both ways! We can still own any gold positions, whether in physical coins and bars, the mining stocks, and so on. But we can also use an options trade to bet against the metal.
That options trade involves buying a put option, and betting that gold will go down. As gold mining companies are more leveraged to the price of gold, we’ll see the best action buying put options against the VanEck Vectors Junior Gold Miners ETF (GDXJ). The fund holds smaller gold companies, whose share price tends to start to decline during periods when gold pulls back—but also when gold prices tend to trade sideways and the market doesn’t attract much interest.
With the May 2020 $31 puts, last trading for around $1.50 or $150 per contract, we have a cheap way to bet on gold prices heading lower. With the fund priced just under $38, the option is about 20 percent out-of-the-money, but if we get a drop as expected, we can likely see a high-double digit gain from this short position, maybe a double if gold prices really get hammered.
Sideways Commodity Trend: Oil. Oil prices had a strong rally at the start of the year, then stalled out toward the middle, and can’t seem to move much in either direction, suck between $50 and $65. Even oil infrastructure attacks on Saudi Arabia, which briefly interrupted over 10 million barrels per day in production, proved only a short-lived boost for oil prices.
We see this sideways trend continuing at the moment based on supply and demand figures, but prices will likely eventually go up on higher global economic growth and as marginal producers from the last boom go bankrupt. That means oil is likely to trade in a $50-$65 range for a while, and presently prices are at the low end of that range.
But, happily, investors have a surprising number of ways to profit from a sideways commodity trend. In the oil space, there are plenty of integrated major oil companies to buy such as Royal Dutch Shell (RDS-A), or Chevron (CVX). These giants both pay dividends over 4 percent at current prices, and investors who buy now can also wait for a spike in oil prices to sell covered call options against their shares. With the income from that trade, they can likely pick up 10 percent per year or more from their holdings.
- No. 1 Commodity Stock to Buy in 2020
Hint: It’s not silver, platinum or any other precious metal. It’s not aluminum, nickel, iron ore or lithium, either.
But without it, we couldn’t make airplanes, automobiles, batteries, boats, cosmetics, computers, surgical tools or smartphones.
Yet this metal could soon experience the greatest supply crunch in history … which could launch its price to levels never seen before.