How to Make Money in Commodities

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sideways pattern until the market made up its mind. The bull market here, unlike in hogs, was just beginning. Early in 1974 copper futures resumed the move up, reaching $1.30 by late April. The profit which could have been earned on each $750 invested was $12,500, or $1,666 percent in four months. In a parallel fashion (as often happens in a related group of commodities such as the precious metals), silver continued the move that took the average futures price in 1973 from $2.00 to $3.00 an ounce. After calming for some months, the January 1975 contract took off at the start of 1974. Here profits were $15,500 per contract on a margin investment of only $1,000.

      Lumber and corn were among the winners in 1975. Corn prices too had been swept up in the madness of '73 when the average monthly cash price of corn nearly doubled. Prices then fell back sharply, but soared once more in 1974 to record highs. Those highs became the channel range you see depicted on the chart for September 1975 Corn. Corn repeated its tendency to retrace big gains, and in doing so brought traders hefty sums, about $4,000 on each $700 margin.

      Lumber was also a quite volatile commodity during this period. It had made high peaks and deep lows in both 1973 and 1974, riding the roller coaster that took many commodities and traders for a ride. Such volatility is difficult to trade, and dangerous, unless patterns that are tradeable develop. Otherwise the careless speculator is wiped out by wildly fluctuating price moves. But the November 1975 Lumber contract presented an attractive opportunity. Here you could have discovered a pattern in the wild career of lumber prices. After so many ups and downs, the speculator who learns from history comes to expect the formation of narrow trading ranges in the wake of severe price volatility. Prices in such periods are said to be "consolidating," as the

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market reevaluates conditions before continuing the previous big move or reversing direction. The November contract fits the model, and returns $2,600 per contract on a margin of $600 to the trader who has been accurately monitoring the action.

      An interesting turn of events brought traders in precious metals considerable rewards in 1976. Both the April 1977 Gold contract and the July 1977 Platinum contract began the year in steady sideways patterns. Early in April, a speculative runup in platinum futures began. Gold did nothing. This time the metals group did not move together. The speculator learns another history lesson: general price tendencies or characteristics, like that of the metals to move together, are no substitute for the laws of real price moves. The trader must go where the market goes, no matter how unreasonable the move may seem. Trader Jones, believing that metals just have to stick together, might have bought gold ruinously or entirely missed the move in platinum. Trader Smith, who charts real prices, and trades only when the move out of an established range actually begins, gets on the right side of both platinum and gold to profit happily.

      The upward move in platinum was worth $2,300 per contract. Meanwhile, gold began its descent out of its own channel. What happened? The speculator should recall that each commodity, even in a related group, has its own set of fundamentals. Platinum has a unique set of industrial uses, most notably in the catalytic converters used to control automobile pollution. The run-up in platinum may have been sparked by the beginning of serious government pressure to increase fuel economy. Heavy demand for cash platinum, however, did not and could not appear overnight, and supplies remained ample despite a drastic cutback in U.S. production. Prices fell back. The chart trader, again, need have known none of this to have reaped the balance of the available profits in the move.

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      Gold, which had hit new highs in 1973 and 1974, started to decline in early 1975. The first months of 1976 were a consolidation period. Perhaps fueled by the disappointing collapse in the platinum market, gold decided to resume its downward move in July to test the bottom. You stood to make a maximum of $2,900 per contract in two months. After all this uncertainty, gold and platinum both ended the year right back where they started.

      Our old friends soybean and soybean meal were, that very same year, demonstrating how related commodities can move in harmony. Profits in soybeans: $11,500 for each $1,000 invested. Profits in soybean meal: $8,400 for each $1,000 risked.

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* * * * * * * * * * * * * * * * * *

      These case histories document the excitement of futures tradng today. Year after year, new contracts begin to form those little lines on the charts that mean riches for the skillful trader. As you practice analyzing the charts and playing the markets, let yourself feel the challenge and thrill that come with successful speculation. The rewards of futures trading are personal as well as economic. Managing your own account, evaluating the markets with your own skills, making decisions based on your own expertise, you will come to know yourself better. There is an exhilaration in knowing that you are responsible for your own success, that you have the talent and knowledge to make the market deliver.

      For a final review, examine the following graphs from the years 1977 through 1980. These were boom years in futures trading, when thousands of new speculators entered the markets. The vast majority of these people lost money! Knowing what you now know about trading commodity futures, would you have been a loser in those years? Or would you have been one of the successful traders who caught the big moves and took home the big profits?

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CORN: PRICE BREAKS THROUGH THE FLOOR OF A LONG ESTABLISHED CHANNEL. PROFITS ON THE SHORT SIDE WERE $5,400 PER CONTRACT.

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COCOA: COCOA PRICES TRIPLED IN A YEAR. CALCULATE HOW YOU COULD HAVE EARNED OVER $1 MILLION ON A $2,000 INVESTMENT. MARGIN WAS $1,000 PER CONTRACT. EVERY 1¢ MOVE WAS WORTH $300.

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CATTLE: THE UPWARD BREAKOUT IN CATTLE SENT PRICES FROM 41¢ TO 61¢ IN SIX MONTHS. POTENTIAL PROFIT TO THE TRADER: $8,000 PER CONTRACT.

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PORK BELLIES: PROFITS ON THE LONG SIDE WERE $12,600 PER CONTRACT.

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WHEAT: PROFITS ON THE DECEMBER CONTRACT AT CHICAGO WERE $8,250.

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THE MOVE IN WHEAT INCLUDES CONTRACTS AT KANSAS CITY AND MINNEAPOLIS. PROFITS ON EACH WAS $7,500 PER CONTRACT.

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