are entering and they are buying at whatever price the stock may be at the time; it shows irrationality. It’s all about short-term profit—making the quickest bucks in the shortest period of time and leaving.
When I look at natural gas prices, this is exactly what has happened. Please take a look at the chart below of daily prices and how it has been a rollercoaster ride for investors in this commodity recently.
Chart courtesy of www.StockCharts.com
In late November, natural gas was trading below $3.75. By the end of December, the prices jumped about 19% and surpassed $4.50. Then they declined for a bit in January. From mid-January to the end of February, they soared significantly higher; we are talking about a gain of 50% in just about 28 trading days.
From there, prices have been declining.
As I have stated in these pages before, I am bullish on natural gas in the long run. My reasoning for this: when prices are low, producers don’t have much incentive to produce more. This creates significant supply problems over time. With a growing reliance on natural gas, the supply problem could get even bigger.
One of the reasons that prices soared between January and February was a short-term supply concern. In cold weather, natural gas is used to heat up homes and factories. With the U.S. and Canada getting hit with a few major storms earlier this year, demand for natural gas for heating grew exponentially. So, the consensus became “buy natural gas” and speculators rushed in. A speculative pop then occurred and realization hit; investors realized the increase wasn’t sustainable.
Should you be worried about the long-term perspective of natural gas?
I certainly am not. Long-term investors have to keep one important phenomenon in mind: assets sometimes go through a period of massive speculation, but then speculators eventually run out.
The fundamentals haven’t changed.
If natural gas continues to trade the way I expect, in the next few years, investors could profit heavily. They may consider exchange-traded funds (ETFs), such as the United States Natural Gas (NYSEARCA:UNG) ETF, as one way to profit from it.
But some words of caution: now that natural gas prices are coming down after seeing a speculative pop, you want to be careful. They are finding support around the $4.50 area for now, but don’t be surprised if they break below. It is also interesting to note that as the prices came down from their peaks above $6.00, we saw volume decline. This means there weren’t many sellers, which can be potentially bullish.
This article is brought to you courtesy of Moe Zulfiqar from the Daily Gains Letter.