Closing Gold

Gold appears to have overstayed it's welcome. Although it has had a strong run, it has overshot it's historic ratio to the USD/EUR by a substantial margin. The market is now excessively long the commodity. In addition, the potential for the IMF to sell gold positions into the market in order to fund it's budget deficit poses a serious downside risk. This, among other issues, has the potential to tip the speculative position over, as it cannot remain this extended.

Streetracks Gold Trust (GLD) recently added 8 tonnes of gold to it's holdings, and now controls close to $20bln of the commodity. This is largely held by retail investors. The volatility of this investor class and trend-following nature of their trading is concerning whenever they are so long of a single position. Although dollar weakness will most likely persist through the middle of this year, the long gold position is no longer a good method of playing this. The Gartmann letter believes gold will hit $1000 shortly. I would rather take substantial profits off the table rather than risk them for a marginal $50 gain, and look at investing in other (net creditor) currencies in order to play the dollar weakness. It is also unclear that the Euro will be able to sustain it's current positon, versus the Dollar or globally. This trade, however, deserves much more research.

Short SPX, Long CT

Cotton

The recent run-up in agricultural commodities has left one crop relatively untouched. Cotton has failed to rise in the same manner that other agricultural commodities largely due to the fact that it is not a food product which, with an increase in global wealth, benefits from the increased global consumption of meat as opposed to plant protein, a process which is far less efficient in terms of energy, food and water. Cotton lags badly behind its all time high, while other crops are experiencing dramatic price increases due to increased consumption and the drop in the USD purchasing power.

Given the high price of Corn and Soybeans, and relative un-profitability of Cotton, especially as agricultural input costs increase, I believe that spring farmers will devote substantially more acreage to the former crops, creating supply constraints for cotton at the end of the season. This is good news for holders of Cotton futures.
Although there remain several risks, notably the growing use of GM cotton in India, which is materially increasing yields and the global slowdown which could impact China's consumption of the crop, I believe that the fundamental factors are strong enough to push cotton prices higher. It enjoyed a material gain today, and I am going to look to add to my position at lower prices. A relative-value method of placing this bet would be to go long cotton and short the DJ-AIG index, which would hedge against the coming macroeconomic slowdown, however given the recent volatility of this index, I believe placing the straightforward purchase of CT contracts represents a less risky position than the hedged position, at least at the present.

Long Gold, Short SPX, Long CT

Cotton versus other agricultural commodities, and cotton acreage planted (only updated annually) versus price.

Some pertinent articles:
http://southeastfarmpress.com/cotton/commodity-prices-0219/
http://southwestfarmpress.com/cotton/future-prices-0215/