Commodities have had quite a year in 2010, with markets such as gold, cotton, and copper looking to close at or near all-time highs. It's time to look ahead to developing trends for the year ahead and I'll share which markets I believe will offer the best potential trading opportunities in 2011.

At its last policy meeting of the year on December 14, the Federal Reserve left its key short-term interest rate near zero, as expected. The Fed said the economic recovery is continuing, but not fast enough to warrant an end to its quantitative easing regime. Unemployment in the U.S. remains stubbornly high at 9.8 percent. The Fed did say household spending "is increasing at a moderate pace," but the economy "remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit."

The Fed doesn't seem too concerned about inflation, but there are signs it is accelerating in many regions. China's inflation rate is barreling ahead, reported at 5.1 percent in November. In the U.K. inflation is also heading up, at 3.3 percent. China has said its primary goal in 2011 is to rein in inflation, and more tightening measures are likely. China has to be careful how much they raise their interest rates, however, as raising rates too much carries risks. Chinese demand remains robust, so I don't think these rate adjustments will have a measurable impact on the longer-term commodity boom.

Energy

My top pick for 2011 is crude oil. I think we could really see some significant appreciation in the coming year for a number of reasons. The record high prices we saw in 2008 may not be repeated in the near-term, but looking at the technical picture, the trend appears to be headed higher.

We've seen a drawdown in inventories; for the week of December 10, 2010, the U.S. Energy Information Administration reported oil stockpiles fell 9.9 million barrels, after falling 3.819 million barrels in the week ended December 3. In addition, OPEC seems happy with higher prices and don't look to change production levels. We continue to see demand from emerging markets and a low interest rate environment should aid demand in North America. 

Crude oil futures have carved out a range of $80 - $90 a barrel this fall, although action in the past two-three weeks has been volatile. The 50-DAY MA at 84.25...I think prices may be lofty at current levels , and should come down to test the lower end of the recent range. If the market can move past $90, I believe we'll see more money coming in, and higher ranges in 2011. Crude oil has been underperforming this year relative to other commodities, such as gold, and analysts have been increasing their price targets.  If you would like to purchase crude oil futures but feel the front-month contract is too volatile, you might consider a farther-dated contract or an options strategy.

Food

We have a growing world population, and emerging economies are getting wealthier. People can afford more food, and a wider variety of food. My top pick in the agricultural markets is soybeans, but I also like corn. We have seen issues recently with the soybean crop in Argentina, which might not see significant supplies to meet demand. Recently, Oil World lowered its crop forecast due to dry weather by 1.5 million tonnes to 50.5 million, and said further downgrades are possible if weather doesn't improve.

From a technical perspective, soybean futures are currently trading above their 50-day moving average, following a cross in the 50-day over the 200-day in the summer of 2010. I anticipate a target price of $14.50 a bushel in 2011. The high during 2008's commodity boom was $16.63, and while I don't see the market getting that high, I think a move above $13 is certainly realistic. 

I also believe 2011 will be a good year for corn. Corn is also trading above its 50-day moving average, and if it breaks above $6 a bushel, I think it will be smooth sailing for the bulls up to $6.50. I think the fundamentals will support this market.

Metals

In the metals sector, I think gold and silver will be good performers in 2011, but industrial metals are likely to offer more bang for your buck. We are running into potential supply shortages in copper, and demand remains strong. If demand continues, where will we get more copper?

Platinum is also undervalued right now relative to the gains we've seen in other precious metals. Gold is up about 28 percent for 2010, silver is up more than 70 percent, but platinum is up only about 16 percent and copper 24 percent.  I think there is likely to be a slight shift in the reasons behind rallies in the metals markets in 2011. investors are more likely to purchase hard assets in 2011 as an inflation hedge, while in 2010, investors purchased gold and silver primarily as safe havens.

I favor outperformance in the industrial metals over the precious metals in 2011 mainly because of growing emerging market demand. China has been buying and stockpiling these commodities. Copper, which is used in wiring, cable, electrical and plumbing, has great potential if global growth increases.  COMEX copper futures tested the 2008 high above $4 a pound recently, and London Metals Exchange copper futures hit a new all-time record in December.

Keep in mind, if China does raise its interest rates further or enacts other measures to dampen inflation, all commodities are likely to see pullbacks. I don't see those actions as derailing the bullish outlook for commodities in 2011, and I would recommend savvy investors and traders use selloffs as buying opportunities.

If you’d like more information on this topic or have other questions about the markets, please feel free to contract me.

Kyle McEwan is a Market Strategist based in Lind-Waldock's Toronto office, and is serving clients in Canada. If you would like to learn more about futures trading, you can contact him at 877-840-5333 or via email at kmcewan@lind-waldock.com.

The data and comments provided above are for information purposes only and must not be construed as an indication or guarantee of any kind of what the future performance of the concerned markets will be. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable. Futures and Forex trading involves a substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. Please carefully consider your financial condition prior to making any investments. Not to be construed as solicitation.

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