Why am I becoming bearish? Well, I still like commodities and see them as an important long-term asset class. The bull market remains intact and those investing for the long term have nothing to worry about for some years.

Commodities correction?
Shorter term (i.e. until the end of the year), however, I see little value in holding most commodities, and my trades are moving to the short side. I am not talking about taking massive short trades. I am talking about a few small trades and building up the positions. I am also using covered warrants to avoid painful swings.

In brief, I am starting to hear more about commodities, with mainstream news channels running stories about why your local Indian takeaway has had to cut down on its rice portions, why biofuels are using up all the corn and why oil will be hitting $200 in the next few months. By the time it hits the front page we are normally at or near an end of the run.

In March, a headline read ‘Gold soars as collapse frightens investors’. Since then, gold is down 20 per cent from the high, wheat prices are down 35 per cent from the March high and soybeans are starting to break down, with lower prices on the horizon.

My sense is that many are starting to believe commodities are a one-way bet and profits can be made quickly, but we know this is not the case. So far, the wheat and soybean crop looks like being strong, so the hype over shortages should be proved wrong in the next few months. My suggestions are buying put warrants on December Wheat, symbol ST69, and buying puts on January 09 Soyabeans, symbol ST66. At this stage, I am not shorting corn as I still see it holding up better.

US dollar weakness has also affected commodities, and my work shows that the US dollar has now made a bottom. No one can say for how long, but I believe a meaningful bounce and contra-trend rally has started that could last until the end of 2008. I bought the dollar index in March and expect to stay long for the rest of the year. When a currency becomes so out of favour that everyone knows it’s a bad bet, you can say we are close to at least a short-term bottom.

This time last year, a barrel of crude oil traded at US$60, so why in 12 months should that same barrel be trading around $130? Has demand from emerging markets grown that quickly?

Have oil reserves depleted that much? Have geopolitical events become that bad?

My own work shows that oil has a fair value of $80 at present, so we have over $40 of potential profit. If you’re willing to take a risk then try a small trade on Brent Crude December 09 Put, symbol SV06, which has a $90 strike and is currently trading at 43p.

The worst that can happen is the warrant going to zero, and you are buying over 16 months of time value, so you don’t need to worry about being right in the next few weeks. Also, oil companies have had a great time under President Bush, but whoever becomes the next US president will be tougher on oil companies, and I would expect increased regulations on oil trading.

Reuters/Jefferies CRB Index tracks 19 commodities, which is widely regarded as the benchmark for commodities markets.

A pullback could be due.

Gold – a price breakdown
While gold remains in a long-term bullish trend, the past few weeks have seen the price start to break down, and I continue to remain short on gold via both spread bets and covered warrants. Seasonally, we now go into a weaker time for gold, and although we could see some volatile trading, I would expect gold to hit $800 or even $740 before September. At that point, I would be happy to step in and start buying, and we could see one more run-up back to recent highs.

Vince Stanzione has produced a home-study course to teach private investors how to benefit from trading financial spread bets and fixed odds, priced at £347. For more details, visit www.fintrader.net or call 01189 476630.