Why I Love Commodities

Sorry about the dearth of posts lately, but I've been out of town. Speaking of...

I just got back from a trip to beautiful Whitefish Montana. If you're a skier and/or outdoor enthusiast, I can't recommend the city highly enough. On the train ride out there, I ended up having dinner with a couple of Montanans who own and work a farm on the eastern edge of the state. We got to talking and I asked them what they raise, to which the response came from the husband:

"Durum wheat, peas, and chickpeas." On hearing the word wheat, my interest was piqued, so I asked:

"I'm curious, do you ever use futures contracts to hedge your crops?"

To which he jumped into a very long, very interesting discussion about the commodities markets. The short answer to my question was no, because there is no durum wheat futures contract, he doesn't really have the option to hedge in the commodities markets, however, he can often lock prices in advance with individually agreed upon "forward" agreements with grain purchasers, though he admitted that this is not as useful as a true futures contract because there is less liquidity in the market.

"If you can't deliver your full crop," he said "you'd better have the cash". Following this conversation, the man's wife asked me:

"How do you know so much about wheat?" I explained that I was a commodities investor and sometime analyst, to which she said, "Wow, because you sound exactly like our son."

"What does your son do?"

"He's a wheat farmer."

The commodities markets have always fascinated me because, in some sense, it is one of the last, pure markets in the country. When you put a bid in for a commodity like wheat, you're not betting on earnings reports or interest rates, CEO scandals, cash flow statement readjustments, corporate lawsuits, etc. etc. You are simply betting on the price of a bushel of wheat. It is one of the few places in the world of business where the Montana Farmer and Wall Street Analyst are not just peers, but equal experts, and it is a market that is open to EVERYONE. If that doesn't stir your inner capitalist, I don't know what would.

Gold Through the Ages

I've never been on the "CONSTANTLY INVEST IN GOLD ALL OF THE TIME!" bandwagon that seems to exist for some inexplicable reason, nor have I decided whether or not I like the idea of a gold standard, in theory or practice. I like the idea of the Dollar being pegged to something, but I've always been worried that there's nothing stopping everyone from collectively realizing that gold isn't actually useful for anything. I was chatting with a buddy of mine over beers last week, and when I mentioned my trepidation about the intrinsic, actual worth of gold, he said something I found interesting. This friend of mine, I should say in advance, is a big gold standard advocate, so you may have to take this with a grain of salt, but here's, basically, the point that he made (I'm paraphrasing here, I don't typically carry around a tape recorder when I'm having beers with a friend):

• In Ancient Rome, an ounce of gold would buy you the nicest hand woven cloth garment, likely died a beautiful and uncommon color.
• In Viking times, an ounce of gold would buy you a coat of soft, warm, and sturdy furs well made and stitched together with intricate designs and fastened with beautiful artisanal leather work.
• In the Wild West, an ounce of gold would buy you a Wyatt Earp type three piece suit with a frilly shirt imported from France and a perfectly steamed fur-felt cowboy hat.
• Today, an ounce of gold will buy you a beautiful, custom tailored Armani suit with a silk neck tie.

The more things change...

I'd Like my Check Please, Wall Street Journal

Yesterday I wrote a post likening the Orange Juice market on Monday to the climactic scene in trading places. Today, the Wall Street Journal ran a piece doing exactly the same thing. They even start the article off with this solid tidbit:

Orange juice futures trader Dominick Minervini spent years fending off comparisons to Dan Aykroyd in "Trading Places," the 1983 movie that thrust the tiny market into the public consciousness.

"If I said I trade orange juice, everybody would say, 'Oh, it's just like the movie,' " said Mr. Minervini, who has been trading for more than two decades.

So how about it Wall Street Journal, do I get a royalty check now?

The Onion is not that Far Off

The Onion ran a pretty funny news-in-brief yesterday about Obama waiting for the new Springsteen album to gauge the health of the economy. While obviously satire, this isn't that far off from the work a lot of folks are doing in the realm of crowd sourcing, distributed intelligence, group behavior analysis for gleaning information about complex systems (e.g. world economies).

My friend Jack writes a pretty cool blog called "Markets with Search" that examines Google search trends to predict global market behavior. His post on predicting iPhone sales is particularly illuminating as to how one might use this technology, that is freely available to everyone, to do much better jobs of predicting economic figures than what a "professional" analyst will tell you.

In the future, when I get a little time, I hope to apply this sort of mass crowd search analysis to commodities fundamentals and prices. Intrigued? I hope so.