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Inflation or not?

Agriculture.com Staff 04/21/2006 @ 12:21pm

This week brought perhaps the largest rally in precious metals in decades, with silver and gold rallying sharply every day and taking prices to new 25-year highs. However, on Thursday, the opposite occurred with large losses in gold ($12), but massive losses in silver ($2.00). The tremendous impact of the thunderous losses in silver Thursday on the inflation outlook could be felt for months, as its not too often that years of trading higher can be erased in one day (as it was in silver).

Sometimes in markets we have to take the small signals that each market is giving us, and try to interpret that in a larger context. Earlier this week the huge metals/energy rally meant grain marketers had to be more cautious sellers due to the risk of inflation. Now with the huge sell signal in silver, perhaps that era of cautiousness can end?

Today the metals actually recovered, but can they resume their wicked bull market now? Or is this just a recovery before another huge price decline? Smart traders will continue to eye the metals for an indication on whether inflation will continue, or now abate. Crude oil doesn't seem to be fazed much, as it continues to press towards new highs in today's trade.

Grains have their own fundamentals to trade, of course, and so far spring planting is surprisingly slow nationally in corn and spring wheat. Winter wheat had one of its worst weeks in a long time from 4/10 to 4/17, with the Pro Ag yield estimate dropping 0.5 bu/acre from last week. This represents an increase in the national ave. wheat price for the year of 8c, and wheat responded by pushing up to new highs last week. Yet, the rain keeps coming in a 'just about too late' fashion, but with winter wheat one never knows! It can respond to rainfall at almost any time it seems, as winter wheat seems to have more than nine lives for each growing season.

With temps cooling this week across the winter wheat belt, and general rain falling in TX and southern OK (and more forecast the next 10 days for OK/KS), its hard to conclude which direction wheat should go. If the rain materializes, can the yield potential bounce back? Pro Ag estimates still indicate with ideal weather winter wheat could still produce an 'average' crop (trend yield = 45.5 bu). Although its unlikely KS, OK, and TX will be average, most of the rest of the wheat producing states have a pretty good crop in the field, yet.

Whatever you do, don't assume anything in wheat until the year is over, as it's so easy to convince yourself that something is already a fact, when in fact everything is still opinion during the growing season. The big guy in the sky has the ultimate say in things, and he seems to delight in making marketing wannabe's look bad. Just when something seems impossible, it happens in markets.

An example how even the best experts can be wrong was a DTN Ag Outlook session about 3 years ago, when I was on a panel of some of the best marketing firms in the country. At the end, we were all asked about our favorite upcoming trade, and mine was buying gold and silver. Most of the other analysts almost fell out of their chairs laughing, as gold and silver seemed to have fallen out of favor with most speculators (and even users of metals). Each analyst anxiously explained their reasons why this ND analyst was wrong on these two markets, and how they wouldn't likely move at all over the next few years. Today, 3 years later, we are all looking at charts showing gold has doubled in 3 years, with silver tripled in value!!! Markets seem to delight in making the majority wrong, even 'experts'. So if your marketing opinion isn't in vogue, rejoice and be glad. It just might be the trade of the decade!

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