Make a 25% return in the next nine months – buy coffee now
By
Dominic Frisby Aug 20, 2008
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I’m not crazy about coffee. I think it’s an overrated drink, particularly the copious way it’s served today. I prefer tea.
I do like the odd short sharp shot of an espresso and I do like a cappuccino, as long as there isn’t too much of it. A sensible cup will do, not one of these super-sized Starbucks monsters.
But let us leave aside my irrelevant tastes. No matter what your views of the beverage, August is a good month to buy coffee.
Why August is a good month to buy coffee
You know me. I like a chart. There are, no doubt, coffee market analysts noting their findings on the black bean with great care, diligence and detail, but none, to my knowledge, write what you might call ‘page-turning prose’. A chart can tell you all you need to know. What it cost, what it costs now and what it’s likely to cost.
Below is a long-term chart of coffee. You can see it’s been in a nicely ascending pattern since 2000, but, if its highs of the 1990s are to be re-tested, it’s got a long way to go. What’s more, it’s trading towards the lower end of the current range.
Next we zoom in and note what has been a rewarding and remarkably consistent annual trade. Buy coffee in August then sell some five to nine months later, depending on when you meet your targets.
The strategy worked least well in 2005 and 2006. Nevertheless, 03/04 saw a comfortable 30% gain, 04/05 almost 100%, 05/06 25%, 06/07 30%, and 07/08 some 55%. If you play for a 25% gain, recent history suggests you’ll make it. If you make 25% and don’t want to risk missing out on further gains, simply move a stop up and let your profits run.
Cotton also follows a similar pattern
I wrote last week and the week before how August is a good month to buy gold. The same not only goes for coffee, but also cotton – though to a lesser degree. I'm more of a fan of cotton than coffee (it having been about my person almost every day of my life) but it isn’t as straightforward to trade, though it does map out a similar annual pattern. Let’s start with a long-term chart.
We see the same story as coffee: a nice uptrend that has been in place since 2001, but we are still a way off the highs of the 1990s.
Then we move in with our arrows and mark the August entry.
The same strategy works for cotton, but not nearly so well and there’s a lot more (for some) heart-wrenching volatility en route.
For those who want to buy coffee or cotton, there are the futures markets, various exchange-traded funds ETFs (http://www.etfsecurities.com/) and, if the action in precious metals over the past month isn’t warning enough for you of the dangers of margin, you can always spreadbet. Of course, do bear in mind that you can lose far more than your original stake.
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A word on gold and silver
It looks as though we may have found the bottom in gold and silver last Friday, as a real selling climax was reached. Interestingly enough, there was a full moon the following night - but that's a topic for a whole other Money Morning. Silver’s collapse was stunning. It’s interesting to note that the December gold contract bounced off its May 2006 high, which was just at a rising trendline. That gives the chart a nice symmetry.
With the internet rife with stories of a shortage of gold and silver coins, I would expect this bounce to continue, with a first line of resistance for silver at $15 an ounce and for gold at $850 an ounce. Famous last words.
The psychology of the markets
Finally, the chart below was sent to me. I thought it was wonderful and well worth studying. I have been unable to find its source, but if you know please can you email me, so I can give its author due credit?
We have all been there.
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