High Calorie Profits

by Kevin Kerr

At the start of each new year, anyone and everyone is giving his predictions for the coming year, and your editors are no exception. So it’s likely that even only a month or so into 2007, you have heard over and over again how gold is going to explode, oil is continuing to rise and the dollar will fall precipitously. Well, you’ve heard all that from the smart analysts, anyway. All of those markets are, in my opinion, some of the best ways to profit in 2007, but there are others. One commodity that often gets overlooked by the average investor is the main ingredient in something most of us love: cocoa.

“Those Who Trade Headlines End up Selling Papers!”

The above is an old saying among traders, but it’s not always true. One headline that is quite common is, “Cocoa Rises in London as Peace Talks in Ivory Coast Falter.”

Cocoa is one of those commodities we find only in very specific parts of the world, and unfortunately, most of them are quite dangerous. The epicenter of cocoa trading is the Ivory Coast. The Ivory Coast is not a very hospitable place and is constantly in a state of flux, like much of Africa. Cocoa is the mainstay crop of the Ivory Coast and is responsible for the majority of GDP in the tiny country. Disruption in the government – and I use the term loosely – virtually brings exports to a halt.

When this happens, cocoa prices in London tend to ramp up, sending the New York market higher too. Usually, this occurs after a breakdown in peace talks between rebels and the government of Ivory Coast. Rebels in the West African country have rejected attempts by the government to hold direct negotiations with them, rather than following a peace plan backed by the United Nations. President Laurent Gbagbo proposed talks with the New Forces rebels who tried to oust him during fighting in a 2002-03 civil war.

Basically, the Ivory Coast has been split into a rebel-held north and a government-controlled south since 2002. The U.N. has about 6,000 peacekeepers in the country, while France has 4,000 soldiers in its former colony. The constant uncertainty regarding the political future of the Ivory Coast and the fear of smaller physical output volumes from the major producing countries are the prime drivers for prices.

Don’t expect to hear about this on Bloomberg or CNBC, or even from a little bird. Cocoa is one of those commodities that flies way under the radar for average investors and the media, but not here at Outstanding Investments.

So the fighting goes on and is showing little sign of stopping. But what’s bad for the Ivory Coast could be good for your portfolio.

In my continuing effort to bring the world of commodities trading to every investor, I want to explain just how easy it is for you to trade cocoa for your portfolio – yes, that’s right, you.

In my new book, A Maniac Trader’s Guide to Making a Fortune: A Not-So-Crazy Road Map to Riches, out soon from Wylie and Son, I stress the step-by-step way to trade markets just like this. I hope you will give it a read. As I discuss in the book, cocoa trades in London and New York and is a fairly liquid and active market. Depending on where you are in the world, you may prefer one locale to the other. Both exchanges offer futures and options. The margins on the futures are quite reasonable, and the market trades several months of the year. This trade is very dependent on conditions in the Ivory Coast and, obviously, worldwide demand. Demand for cocoa is on the rise as countries like India and China import more and more of the precious commodity, as tastes for luxurious items are no longer relegated to the once-minority elite.

Cocoa prices gained 8.4% in London and almost 12% in New York since the beginning of November 2006, when the U.N. operation in Ivory Coast said it was “seriously concerned” by clashes that had occurred in Abidjan, the commercial capital of the country. I expect that if demand remains constant and fighting and uncertainty remain in the Ivory Coast, prices will rally another 20-30% this year. Now that’s not a sweet nothing – that’s a sweet something for savvy investors like you in 2007.

Editor’s Note: Kevin Kerr is the editor of two highly successful and acclaimed financial advisory newsletters, Resource Trader Alert and Outstanding Investments. A veteran commodities trader, Kevin uses his irreplaceable experience to advise his readers on a variety of commodities investments on a daily basis.  Widely considered one of the nation’s top commodities gurus, Kevin’s expert opinions are routinely featured in the country’s premier media outlets.