Friday

Natural Gas: 5 Reasons to Hold Your Positions

Post a Comment September 11, 2009 – 10:58 am |   | Permalink |  Print This Post |

Natural Gas October contract went up >10% overnight, going from 2.80 to 3.25. Natural Gas ETF just opened for trading and is up 6.7%. We received a call from a fellow colleague who has been loading up on Gas since our first post with an average entry price of $0.56 - feeling doubtful of this rally - citing the possibility of a double bottom hence double the profits IF one were able to unload now and jump back in at lower prices. Whilst this is possible and very tempting, we will NOT be jumping in and out of our holdings. We are very comfortable with our position, and would be happy to load up if prices decide to go further south.

Any way you look at this, we expect higher prices in the long term. If prices make lower low, we will look into taking an “ALL IN” position. This is a chance of a lifetime trade, and if invested intelligently with appropriate leverage, is a potential retirement trade. For the faint hearted who are thinking of liquidating their positions in gas at current levels, here is why we are going to ride this all the way up through the hurricanes and freezing winters ahead:

1. Prices CANNOT go to zero - unlike stocks, commodity indices cannot go to zero. No management risks - just simple supply and demand.
2. Current prices are below cost of production. Even if prices stay at this level, it will only lasts as long as the reserves of gas (and there is not as much reserve as the media would make you believe)
3. Manipulators cannot defy fundamentals. There is clear manipulation to push prices lower, evidenced by the significant contango between monthly contracts. It does not make any sense for gas prices to be 50% higher in just 30 days! This madness will correct itself, and our guess is for the current price to head up. Either way (ie future month contract lower vs current month higher), we have our contango position to profit from this. The big boys know where all your entry points are - and as they push prices lower, the more people they wipe out (where do you think Goldman Sachs trading profits come from?). The problem is this: there is a floor to pushing prices lower - because “Prices cannot go to zero”. The Big Boys know this. So, for the Big Boys to continue to profit from gas, it is better for them to push prices UP. There is NO upside limit to manipulation - hence i would prefer to long in extreme lows than short in extreme highs. Forget about your gas positions, focus on something else for the next 6-12 months. Sometimes the best thing to do is to do nothing.
4. “The trend is your friend”. Contrary to this, we have been breaking the golden rule by trying to pick the bottom (justified by the reasons above in our view). Now we may just have picked the bottom - and even if prices are destined to go lower, eventually there is light at the end of the tunnel. And when the trend turns, make sure we ride this up.
5. Always remember the Big Picture. ETF Natural Gas hit a high of >$3. Be patient, and every time you lose faith or conviction, look at the chart below (Bookmark this page)

Natural Gas ETF Historical Chart

Should prices head lower, we will look to loading up more.