I’ve had a lot of clients wondering how to cope with the dramatic shifts we’ve seen in many commodity markets. We are seeing more and more headlines of economic malaise spreading overseas, and commodity prices are falling amid a worldwide slowdown. Crude oil has fallen below $108 a barrel, down about 26 percent from its all-time high in July just over $147. Gold is down about 20 percent from its all-time high above $1,000 an ounce in March, falling under $800 in recent days.

Copper, which is used in homebuilding and other industrial uses, is perceived as an indicator of global growth, and it’s also been falling precipitously. Copper futures are now trading at a seven-month low.

Europe’s economy is seeing signs of contraction, and some analysts say the situation there is looking worse than in the U.S. right now. In data out this week, the European Union statistics office said European company investment, consumer spending and exports all declined in the second quarter. Investment by companies fell 1.2 percent, the first decline in five years, and household expenditure dropped 0.2 percent. The purchasing managers’ index (PMI) for euro-zone manufacturing came in at 47.6 in August, compared with 47.4 in July. A level below 50 indicates business contraction. In Germany, the eurozone’s largest economy, retail sales tumbled 1.5 percent in July.

Even in Australia, which has been one of the world’s strongest economies, with nearly no unemployment and a solid currency, decided to cut interest rates Tuesday, September 2, in a proactive measure. The Reserve Bank of Australia trimmed its benchmark interest rate for the first time in seven years, to 7 percent from 7.25 percent, amid concerns about the economy, which depends heavily on exports of natural resources. Gross domestic product was reported to have risen only 0.3 percent in the second quarter, and the Aussie dollar reacted to that and the rate cut news by falling to a 12-month low versus the U.S. dollar.

As a result of all this, U.S. Treasuries are rising as more investors want to put their money in safe-havens. And since most commodities are priced in dollars, troubles overseas have led to the dollar’s resurgence, and contributed to the fall in commodities over the past month.

The euro has fallen to its lowest in more than seven months against the dollar, and if the worst is behind for the U.S. (while Europe and even Asia face tougher times ahead), the dollar should continue to gain. Bloomberg reported that OPEC President Chakib Khelil said he expects the global slowdown could cause crude oil supply to outstrip demand by as much as 1 million barrels a day in the first half of 2009.

On a longer-term perspective, if the U.S. Federal Reserve doesn’t raise rates dramatically, and Europe’s economy can stabilize, I do feel commodities will recover and remain in a bull trend for years to come. This commodity setback may in time be viewed as a normal correction. The outlook for many commodities will depend on what actions the Fed and European Central Bank will take, so we’ll have to wait and see. For now, I see the dollar continuing to gain, and recommend a bull call spread in the U.S. Dollar Index futures. Traded on ICE Futures U.S., the Dollar Index contract represents the dollar’s standing against a basket of six global currencies.  I like to look at the 50-week moving average to determine the direction or the "tide" of the market, and the dollar has clearly broken above this average.

Consider the December Dollar Index 80/82 call spread, which should cost about $500, not including your commissions, which represents your defined risk. Your maximum profit, assuming the index can close above 82 by expiration on December 5, would be about $2,000, minus the $500 you paid for the option, minus your commission costs.

Please feel free to call me with any additional questions you have about this or other strategies suited to your particular account size and risk tolerance. And ask about our special half-off commissions offer for new clients.

Phillip Streible is a Senior Market Strategist with Lind Plus. He can be reached at 800-803-8037 or via email at pstreible@lind-waldock.com.

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