SAN FRANCISCO (Dow Jones) -- Commodities investors still recovering from last month's whiplash should brace for more bruising jolts ahead. While optimists still abound, even they admit that big swings are more likely in coming weeks.

The best way to proceed is "with extreme caution," said Richard Feltes, director of commodity research at futures brokerage MF Global in Chicago. "We've had a very healthy correction. We know the commodity market is not bullet-proof in dealing with issues from the outside."

During the third week of March, oil and gold hit record highs. Then in just three days, they tumbled from those highs by 12% and 11%, respectively, after a Federal Reserve rate decision triggered a flight to cash, apparently by funds seeking quick gains to offset losses in credit markets. Grains and other agricultural commodities, whose prices had shot up alongside energy and metals, fell back to levels not seen since January.

Many commodities have retraced past gains in recent days. But the lesson's been learned.

"It's been exceedingly volatile. That would caution you against significant positions," said Leonard Kaplan, president of Prospector Asset Management, a futures brokerage in Evanston, Ill.

Strategies to ride what many analysts are expecting to be continued bumpy markets range from putting in place short positions, selling down long positions or -- for the most optimistic -- sticking it out.

The choice depends on how much further an investor thinks prices will rise, if at all. And that viewpoint increasingly seems pegged to factors outside simple supply and demand for the underlying commodity -- starting with investment flows. The year-to-date commodity spike has more to do with money managers seeking a hedge against inflation, the weak dollar and financial uncertainty than with low stockpiles and surging demand, say analysts. The rally has fed on itself.

"It's just money chasing money that's driven gold to new highs," said Kaplan. "It's 'buy what's hot.'"

Time to take profits?

With oil prices up about 60% in the past year, gold about 40% higher and soybeans up 66%, pocketing at least some of those gains may be a wise move.

"We have had a tremendous run in this market since late 2001, and anyone, including those who have purchased commodities through fall 2007, is looking at very handsome returns," said MF Global's Feltes. "Certainly it may be prudent to capture some of those gains."

But Feltes said he's not ready to call an end to the bull market.

"Because of this phenomenon of continued investment in commodities, until we get through the growing and hurricane season, commodities will be bought on the breaks," he said.

A damaging hurricane season, which starts in June, could trigger higher prices in oil and natural gas, while the growing season will yield more information on North American grain supplies.

Some bargain hunting seemed to be taking place in the days following the big tumble in commodities. After European traders returned from their Easter holiday weekend, gold bounced back to nearly $950 an ounce, though bullion had fallen back to the $916 an ounce range Monday. The StreetTracks Gold Trust (GLD) and Market Vectors-Gold Miners (GDX) exchange-traded funds have edged back from their March rout.

Oil has returned back above $105 a barrel, up from under $99 during the third week of March. Grains also rebounded a bit.

"The pent up orders out of the [Easter] weekend decided to be on the buy side -- a lot of that had to do with liquidation being finished at hedge funds," said George Gero, a precious metals floor trader for RBC Capital Markets' global futures division, last week.

Technical aspects of the sell-off and nascent recovery have given some traders confidence that there's still a lot of investment demand in the market.

Tight spreads between gold contracts, including between April and June contracts, made it more enticing for investors to roll their positions into the next active trading month, Gero says. That was a help for prices because it ensured volume wouldn't drop off sharply when the contract was close to expiring.

"It's much cheaper to maintain a gold position and roll it over," Gero said.

But not everyone is convinced commodities are positioned for a rally. For them, there are a few options, including shorting gold. Deutsche Bank's DB Gold Double Short ETN (DZZ), an exchange-traded note that shorts gold, rallied 14% when bullion dropped sharply in mid-March.

Kaplan of Prospector Asset Management said he would prefer to sell call options on gold futures if they return to recent record levels. Or, he would sell futures on "very significant" rallies.

"The key to my thinking is that we aren't going to see new highs," he said.

  (END) Dow Jones Newswires
  04-01-08 0018ET
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