An Insider’s View On Commodity Prices

| May 18, 2010 | 0 Comments

I know many of you are avid stock traders.  You monitor the markets like a hawk.  You’ve figured out your entry and exit points, and you have a strategy in place.  But now, let me ask you a question.  How often do you look at commodity news?

Every day?  Once a week?  Once a month?  Never?

If you haven’t looked at the commodity markets recently, you’re missing out on some very important information.  Just because you don’t trade commodities doesn’t mean you should ignore them.

You can learn a great deal from the commodity markets… and that information might just help your trading.

Let me give you an example.

Take a quick look at Rio Tinto (RTP) stock.  You’ll notice in the last three months the stock has moved steadily higher.  Then it suddenly fell off a cliff.  Is the sell-off justified?  Is this the start of a downtrend… or is this a buying opportunity?

You’re only going to figure this out by looking at news in the commodity markets.  Let’s take a closer look and see what we should do.

If we take a step back, we quickly realize Rio is one of the largest commodity suppliers in the world.  They mine and process Gold, Copper, Aluminum, and Iron Ore… just to name a few.

It makes the news from the commodity markets all the more important for this stock.

Commodities have been quite volatile recently.  Demand from emerging markets was pushing prices higher.  Then China announced plans to cool off their economic growth.  They’re worried about excessive inflation.

While controlling inflation is good, the announcement led to a fall in commodity prices.

Some investors are wondering if the fall in price is temporary or long term. Wouldn’t it be nice to get an insider’s view on commodity prices?

We have one.

I already know many of the mining companies are expecting prices to move higher.

How do I know?  I’ve been paying attention to the commodity markets. Take a close look at Iron Ore.  This is one of Rio Tinto’s largest products.

Rio digs it up by the ton, processes it, and sells it to the markets.  Nothing shocking there.  But there was a huge change in Rio’s sales process recently.  They made the change a few weeks ago and it tells us exactly where Iron Ore prices are heading.

What was the change?

In early April, Rio Tinto joined BHP Billiton (BHP) and Vale (VALE) in shifting from annual pricing to quarterly pricing.

It doesn’t seem like a big change, but this is huge!  This little detail speaks volumes about how prices will move in the next few quarters.

Think about this for a moment… traditionally, prices were locked in for a year.  That’s great for the supplier when prices are stable or falling.

But now the supplier, Rio, wants shorter term contracts.  You’re only going to do that if it means better pricing for your product… and you only get better pricing if the market is moving higher.

It’s a double-edged sword for suppliers.  Right now this sword is cutting its way toward bigger profits.  The more money miners like Rio, BHP, and Vale can charge for their commodities, the bigger their profits.

Here’s the amazing part.  The announcement of quarterly contracts was made in early April.  Since then, the stock price has only fallen.

It doesn’t make sense to me… the inside negotiators at Rio are effectively saying commodity prices are moving higher.  And not in the next five years… or the next year… but as soon as a quarter or two from now!

This shows me the recent fall in Rio’s stock price isn’t justifiable… and it makes the company all the more attractive.  If you’re looking for a great way to play a booming commodity market, take a quick look at Rio.  I think you’ll like what you see.

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Category: Commodities

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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