Trade carefully: Commodity markets are in for a volatile week

As the EU referendum approaches markets of all shapes and sizes, including commodities are becoming increasingly driven by expectations of what the result will be. Commodity markets such as gold have become correlated with the implied probability based on the betting odds of the UK remaining in the EU. Putting aside the relative macroeconomic merits of Brexit to one side commodity market volatility is likely to remain high throughout this week.

We are now entering a period of no-mans land where there will be no published polls. Having said that many financial institutions have reportedly commissioned their own private surveys of voter intention to help them trade. But even these will not be on the same scale as the exit polls typically carried out on the day of the general election.

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Wheat prices: The top 10 most important drivers

1) Energy costs

Higher energy costs imply higher costs of production for wheat and higher costs of transporting wheat to market. Energy makes up a significant part of operating costs for most crops. This is especially true when considering indirect energy expenditure on fertiliser because the production of fertiliser is extremely energy intensive, requiring large amounts of natural gas. For some crops – including wheat – the combined cost of energy and fertiliser make up more than half of the total operating expenses in the US.

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Blind faith: Why following commodity forecasters is a bad idea

We all like to read forecasts of what the future holds. But, in the case of the outlook for commodity prices is following the lead of one commodity forecaster or another just blind faith?

Over at Cullen Roche’s excellent Pragmatic Capitalism blog, Cullen illustrates a point about the multitude of articles about how bearish George Soros is on a particular asset market. Cullen goes onto say how this could potentially lead individual investors into trouble.

In all seriousness, the key lesson here is that we need to be very careful about how much we read into news headlines about market gurus. It’s very easy to get swept up in the idea that a wealthy investor knows more than the rest of us and that we should follow their disclosed moves as reported and after the fact. The financial media loves to use big names to grab headlines and page views. But in many cases you’re not getting the full story about what this investor is doing. And following their supposed positioning could lead to bad decisions and unnecessarily poor performance.

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