How to Make Money in Commodities

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-- soared to heights undreamed of even by the most ardent bull trader. Metals earned their reputation as the most dangerous game in futures trading. When it was all over and the dust had settled, even multi-billionaires found that you could be ruined by not respecting the decisions of the marketplace.

      The upward climb of metals prices had been slow but generally steady since 1976, with gold outperforming slower moving markets in silver and platinum. During the 1970s, many factors drew together to attract new, high-stakes players to the futures markets in metals. Growing global economic and political crises prompted everyone from the retired pensioner to the Arab oil sheik to seek a hedge against chaos and inflation. The final separation of silver and gold as commodities from U.S. and other monetary systems created the conditions for a speculative surge. Old style fundamentals like mine output and industrial use, though still influential, were overshadowed by the new set of economic and political fundamentals: the metals markets became an international barometer of global tensions and fears. At the same time, a small group of "silver bulls" led by the superwealthy Hunt family of Texas accelerated their program of enormous speculation in silver futures and massive hoarding of silver bullion.

      In the fall of 1979, a crowd of Iranians stormed the United States embassy in Tehran and took some 50 Americans hostage. International political anxieties mounted daily as the unprecedented crisis dragged on. American "war fever," the increasing nervousness of Arab investors who feared similar events in their own countries, and a certain amount of simple market hysteria and human greed sent metals prices into the stratosphere, far beyond the range of their traditional and historic ratio to other prices in the economy. Exchange and brokerage officials scrambled to control the situation in

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the face of sensational publicity and government criticism. One of the rules of the game was that the rules of the game could be changed in the middle of the game, if the exchange so deemed it necessary. Many long-time traders, some of them prominent members of the exchanges, had been caught on the wrong side when prices exploded. To slow the trade and limit volatility, margin requirements were raised so high in response (reaching over $75,000 per contract in gold and silver) that all but the most wealthy were effectively shut out of the market. Limits on new positions were imposed, and these with other measures helped precipitate the wholesale collapse of the silver market and the big fall back in gold and platinum. Without sufficient new numbers of buyers, bull traders could not continue driving prices up. The foundation (if there had been any real one in the first place) for high prices disappeared, and prices went back through the floor. Some traders who had kept on buying at very high levels found themselves wiped out when the reverse came.

      These were not easy markets to trade, especially after the big moves were well underway. But the calm, careful method trader could have caught the moves in gold, silver and platinum back in the middle of August, 1979 when margins were still low and markets liquid. Then it was a matter of skill, luck, and a bit of daring to hold on during the October-November fluctuations and into the dramatic peak period. Here greed would have destroyed the position, as too many new contracts bought at high prices would more than offset gains made on the first contracts. These were generally not markets for those with limited means, unless they got on board early, traded conservatively, and took profits reasonably. Still, in all, it could be done and it was done by many average speculators.

      Gold: The October 1980 contract penetrated the $350

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ceiling in August, 1979, signalling a buy at that price. Contract high came in January of 1980 at $940, a profit of $59,000 per contract. Limit moves and extreme volatility would have hampered the trader trying to exit the market, however, so a more reasonable point at which to expect liquidation would be about $750. There, profit would still have been $40,000 per contract (margin in the first half of 1979 was $1000 per contract).

      Silver: The August 1980 contract broke the ceiling of $10 in both July and August of 1979. That was the time to buy. Silver topped out early in 1980 at $43, a maximum profit of $151,500 per contract. A more reasonable exit estimate might put liquidation around $37.00. Profit at that level would have been $135,000 per contract (margin in early 1979 was $2000 per contract).

      Platinum: The move in April 1980 Platinum began in earnest in September of 1979. The method trader would have bought at $440, and watched prices climb to a record of $1,020. A reasonable exit would have been near $880, for a profit of $22,000 per contract (early 1979 margin was $1,500).

      The economic pressures of 1980 gave the trader numerous other outstanding profit opportunities in less tumultuous markets. Record high interest rates designed to slow inflation caused a complete collapse in the market for long?term U.S. Treasury Bonds. June 1980 contracts paid a maximum of $26,000 per contract on a $3000 margin. Spurred by poor global harvest predictions, and by renewed speculative interest, sugar performed magnificently, bringing the method trader a maximum of $30,240 per contract on a $2000 margin. High oil prices began to lessen the attraction of synthetic fabrics demanding petroleum for their production, while textile manufacturing continued to expand in the underdeveloped nations. Result: profit on the May 1980 Cotton contract was $10,000 on a $1000 margin.

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III

      What does the future hold for commodity futures trading? The evidence of history, in case after documented case, strongly suggests that identical trading opportunities to those you have already seen will occur, year in and year out, for as long as futures markets exist. The trading principles and methods you have learned, and seen illustrated, in this book will apply throughout the coming years. With them you will be able to trade new contracts as well as old, at any exchange, as long as you proceed carefully and according to the rules.

      What year is it today? 1982? 1988? 1995? 2001? No matter. The patterns you have taught yourself to recognize are there for you to profit by. Individual commodities and individual contracts may come and go, but the basic principles of successful futures speculation will never fundamentally change. Indeed, the central lesson of the method we have been examining is that the trading pattern occurs regardless of the type of commodity or the year it is traded. The method trader is watching for price patterns, specific kinds of price movements. If considerations of other kinds are given too much weight, the trader can be easily led astray, instead of following the actual movement of prices as the market determines them.

      To prove the point to yourself, go down to your broker's office today and borrow or copy a set of price charts for the last year or so. Look through these charts keeping in mind the

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lessons you have learned in the last two chapters. Examining the charts, you will doubtlessly find the same kinds of sideways channels, breakouts, and upward or downward price moves that have shown themselves regularly since the beginning of trading. These are the constantly repeating price patterns that continually present knowledgeable traders with excellent profit opportunities, whether the contract be in soybeans or moon rocks, whether the exchange be in Chicago, London, or the Milky Way. Prices can still only go one of three ways -- up, down, or sideways, and as long as that is so, the speculator will have many chances to make a fortune in commodities.

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THE PATTERN YOU HAVE STUDIED WILL BE REPEATED, YEAR IN AND YEAR OUT, AS LONG AS THERE ARE FUTURES MARKETS.

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      Take a look at the charts on these and the following pages. They are examples of the types of opportunities you can expect to discover in your own day, and in the future. The names of the commodities have been left blank, and the years are hypothetical, but the odds are that each and every one will soon be repeated. Comparing your own charts for recent years with these models, you'll be able to fill in the blank where the commodity's name belongs, as you spot and profit by movements just like these. You will see how many fabulous opportunities have arisen since this book was written and published, how many times you could have made 500 or 5,000 percent on your investment. Don't let the future in

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