Gold and Oil: Why These Two Commodities Are Set to Blast Higher in 2010

by Lee Lowell

Gold and Oil: Why These Two Commodities Are Set to Blast Higher in 2010

by Lee Lowell, Stock and Commodity Option Specialist

Thursday, December 17, 2009: Issue #1160

If you're looking for some calm during the market's ongoing storm, don't expect to find much in the commodities sector.

Not that this is a bad thing.

If you know what you're doing, commodities offer some of the most lucrative and potentially explosive profits anywhere in the investment world. And because simple supply and demand is the key driver for many of these everyday products, it's a sector ripe for volatility and speculation from hedge funds and large institutions.

Heck, you only have to look at the oil market to see that in action.

It's not uncommon to see prices cycle from highs to lows and back to highs again in a relatively short time. And it's this rapid-fire, rollercoaster movement that causes many would-be commodities investors to park themselves on the sidelines, rather than risk their cash.

But this is often a mistake - particularly since there are some quick and easy ways that investors can take advantage of the world's commodities. So let's see what 2010 has in store...

Why The Price of Oil Is Headed Back to $100

It wasn't long ago that oil prices blasted to all-time highs around $147 a barrel (July 2008, to be exact).

But they then set off on a remarkable decline that culminated with the price sinking to lows around the mid-$30 level by early 2009 - a full $115 or so lower than the record high, which equates to a staggering $115,000 move in equity on just one contract.

But as the chart below illustrates, oil has spent most of 2009 busily clawing back a sizeable chunk of the downward move - and I expect that trend to continue in 2010.

To see this chart in its original size, click here.

With momentum still on the bullish side, oil prices should continue to rise next year, due to the following factors...

  • Global oil demand is ticking higher.
  • Geopolitical issues are ongoing in the Middle East and oil-producing parts of Africa.
  • Oil is a great speculator's market - a fact that the massive amount of media attention helps to perpetuate.

In addition, the price of oil currently sits just above a major support level - the green 200-day moving average.

Right now, oil is still about $10 away from its high of $82 in October, but look for the price to test the $100 level again in 2010.

So how do you play the move?

Two Ways to Trade Rising Oil Prices

It's not as difficult or risky as some in the media would like you to believe. The easiest way to trade oil, aside from investing in individual oil stocks, is to go for the very popular and liquid, exchange-traded fund (ETF).

  • United States Oil (NYSE: USO): This trades like any other stock on the NYSE and gives investors a safer, cost-effective way to capitalize on the movement of oil prices. It also has options available.

If you're familiar with commodities trading, though, you can opt for this route...

  • Futures Options: You can trade oil directly through the futures, or futures options market on the floor of the NYMEX. But I suggest you steer clear of futures contracts and stick with limited-risk call option strategies.

The June 2010 options offer the best value right now, and whether you play them through the futures options market, or USO, it should give plenty of time for your directional prediction to play out.

But given the volatility of the oil market, if you have profits, take some money off the table.

Now onto the gold market...

Gold $2,000? How to Play New Highs for the Yellow Metal in 2010

They say a picture tells a thousand words, so just take a look at the chart below...

To see this chart in its original size, click here.

Having begun 2009 trading around $850 an ounce, gold has spent the year shooting higher. The frenetic run culminated with an all-time high of $1,218.

The reason is two-fold: The U.S. dollar's demoralizing decline, coupled with the weak state of the U.S. economy that has seen many investors flock to traditionally safer investments like gold. Mix in a hefty bout of bullish speculation and you've got the recipe for higher prices.

But with gold prices falling from that lofty perch over the past couple of weeks, we may well see plenty of investors trying to "buy on the dip" and take advantage of the next upward move. These are likely the same investors who believe the dollar will continue to languish, so expect to see gold set more new highs in 2010. Some analysts are even calling for gold to top $2,000 per ounce.

In the short-term, however, we could see gold continue to pull back to the 50-day moving average line just under $1,100. And if that line is breached, there is solid support at the 200-day moving average at $985.

If you want to take advantage of the pullback by buying gold on the current dip, there are a few ways to play your prediction...

  • SPDR Gold Trust (NYSE: GLD): Like USO for oil, GLD represents an easy, cost-effective, safer way for you to capitalize on the movement of gold prices. But if you want more leverage, you could buy call options on GLD. This allows you to put less money into the trade while potentially making a much larger percentage return than just buying shares of the ETF outright.
  • Gold Futures Options: If you want to go to the source, you can buy gold futures and/or gold futures options that trade on the COMEX in New York. But given the high risks associated with trading futures contracts, we recommend you stick with limited-risk call option trades instead. Go for option expiration dates at least six months in the future. June 2010 gold options are your best bet.

Good investing,

Lee Lowell

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