Traders' Roundtable

I just read this article the other day and I'm curious what others feel regarding the transformation of the commodities market over the past 3-4 years.

It seems that over the past few years there has been much more visibility of commodities amongst the general public causing an influx in both “infomercial investorsâ€

Volatility = Opportunity

"Good" volatility = profits for trend followers. A relatively smooth increase or decrease in price over a period. Bad volatility - price moving from A to B in a horrible jagged way = getting chopped to pieces. Dependant on one's timeframe.

Kaufman argues that greater particpation in markets over time leads to less good volatility and more bad. I think he is probably correct.

Yes, I see what you're saying --- the dreaded whipsaw!

Right. This is my concern. A lot of whipsawing is not good (for trend followers) and is generally what makes the stock market a pretty lousy market to follow trends. Commodities, for the most part, have not (until recently) been wholly subjected to this phenomenon.

So, it gives me some pause to think about how my trading strategy might need to be modified to adapt to this changing market.

volatility= death (if trading without stop loss)

I thought what Paul Tudor Jones had to say was pretty interesting on the influx of diverse types of entities who were buying oil contracts in 2003.

See the following link for the webcast:
http://www.clicklive.com/NYMEX/symposium_2003/jones.htm

I always thought it would be neat to keep up with contracts like Paul Jones. But I have not made time to do that, it was however interesting to see his prophecy fulfilled on measuring inflation.(millions of contracts)

I would suppose that these markets are acting similar to how they have always acted when they caught a bid back in the old days. In fact one gold bug overlaid our may 2000-2006 gold rally over the 1972 gold run up and it seemed to rhyme pretty good in percentage terms and trading day lenghts for those terms.

Stephen S. Roach, Morgan Stanley's chief economist, wrote in September that the tidal wave of money that has flowed into commodities over the last three years has transformed commodities markets "from one of the best real-time gauges of economic activity" to a financial asset like any other -- that is, one that's susceptible to hysteria and bubbles.

"Just as return-hungry investors chased these markets on the upside, they could well run like lemmings to get out on the downside," Roach wrote.

And they will if history is any guide to the future.
It seems to me that history is not bereft of these type instances.

Markets are not efficient, people get enraptured in euphoria, or fear as the case may be, and the pendulum swings from overpriced to undervalued and back again.

Not that I know exactly where that turn is or will be, but let's suppose you you adjust gold for inflation. According to the economists at Mises.org gold was actually worth around $4,300 an ounce in 2003. (Suspected Treasury reserves/M3).
So either the market didn't know that or it is not efficient? (Perhaps we are on our way to $4,300 ounce Gold? Or beyond in the case of hysteria?

I don't know. I would test a system over the last commodity launches of previous years and eyeball how a system has performed over the recent upswings to see how well it captured said "Tital waves of Money" on the way up, and then how it exited.

If the results were acceptable then I wouldn't worry about another economist who gets paid to conjecture about form without facts.

Of course, that's my humble 2 bits.