Barron's cover story notes commodity bull markets are being fuelled by retail speculators, while seasoned commercial players are betting on a downturn.
Here's the gist of Barron's short case:
The CFTC (Commodity Futures Trading Commission), due to the relatively limited capacity of commodity markets and the ease with which they can be moved, puts limits on the sizes of speculators positions. However, commodity ETFs, pools and mutual funds sidestep this limitation through complex deals that have them buying and selling off-market through a conduit called the International Swaps and Derivatives Association [ISDA]. The CFTC is aware of the situation, and is gathering on Apr. 22 "to hear firsthand from participants to ensure that the exchanges are functioning properly." An idea of just how deep-rooted the problem is: ETFs, mutual funds and commodity pools seem to account for a full 60% of all bullish commodity positions.
Commodity bull Jim Rogers notes that there are about 70,000 mutual funds in the world, and only about 50 that invest in commodities. He thinks the speculative bubble has a few years to go. But looking at the 'smart money' -- farmers and others who actually trade in and use the physical commodities -- tells a different story. Net commercial shorts are 30% higher than a previous record.
Factors that could burst the bubble:
- Even the slightest hint of a China slowdown (much of the bullish outlook is due to the perception of an 'insatiable' China).
- A U.S. recession.
- A stronger dollar (commodities are dollar-denominated).
- A stronger stock market, leading people to put money back into stocks. (Or, conversely, a weaker market that sees traders liquidating commodity longs to meet margin calls. Barron's doesn't mention this, but it got some mileage when gold and oil dived suddenly a couple weeks ago.)
- The CFTC changing its exemption of position limits on index funds.
Société Générale analyst Albert Edwards says the commodity bubble is "nonsense on stilts," and is sure prices will unravel before year-end. Barron's says prices could drop 30% as speculators retreat.
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Here's what some Seeking Alpha contributors have recently said on the topic:
- Stephen Frankola agrees with Barron's. He says the commodity bubble needs to burst. While it's impossible to say when, rationality will return, and shorts will be the winners.
- Andy Abraham calls today's market a dot-commodity bubble. "We all know that investors love to chase returns," he writes. "Many of these charts look uncomfortably familiar, like housing prices in California a few years ago and the technology-stock heavy Nasdaq composite index in the late 1990s. We know those bubbles ended badly for investors chasing returns. Remember the dot-com bubble? Don't get caught up in the dot-commodity bubble."
- Meanwhile, Tim Iacono ridicules commodity shorts who are ready to celebrate every time the markets seem ready to turn. He likens the Fed talking the markets down to British police, who, without firearms, stop and yell at escaping criminals, "STOP! Or I'll yell STOP again!"
- Bob Zieger says high commodity prices, particularly oil and byproducts, are here to stay.
- Finally, Roger Nusbaum says he's always believed in commodity exposure, provided it's moderate. He says some exposure adds "a little zig to my stock market zag," but stops short of calling it a "bet on commodities." He doesn't give an exact formula for exposure, but says he's not comfortable with anything close to the 20% often batted around.
Iacono also has a superb post that analyses the various commodity ETFs and their holdings. Big funds include DBA, SLV, DBC, USO, GLD and IAU.
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This article has 68 comments:
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NARSpin
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27 Comments
Mar 29 09:38 PM-
chistletoe
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50 Comments
My Website
Mar 30 06:10 AMHow many times is Barron's going to tell us that $5/barrel oil is just around the corner? In your dreams!!!!
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jeff a
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11 Comments
My Website
Mar 30 07:35 AM-
rdial54
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74 Comments
My Website
Mar 30 08:08 AM-
Philip Obal
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72 Comments
My Website
Mar 30 08:19 AMMetals? Precious Metals? Grains/Food? Oil?
BTW, IMHO, Oil demand & prices should stay high, until the hydrogen cell becomes very popular and is available at low cost for consumer applications like cars.
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User 167026
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1 Comment
Mar 30 08:20 AMmy risk tolerance is very low Any advice would be very appreciative
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nukldrager
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246 Comments
Mar 30 08:47 AMAre we dead? I'll come visit you in the Astral plane! lol
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mixter
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91 Comments
Mar 30 08:54 AM-
Paul H
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25 Comments
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Mar 30 10:41 AM-
Mitch Tuchman
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6 Comments
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Mar 30 10:51 AM-
Donald Johnson
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181 Comments
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Mar 30 11:17 AMThe commercials can be short futures because they're hedging actual commodities or currencies. The hedges never are perfect, but they're basically protected. Speculators may feel protected by being in complex spreads, but spreads can go wrong real fast. Ask Bear Sterns.
The ETFs and mutual funds in futures had better have good lawyers, because if they don't play these markets successfully, their defense attorneys will, win or lose.
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richandmer
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39 Comments
Mar 30 11:22 AMWish they could be more specific and provide details where there are hidden supplies of oil, grain, fertilizer, iron ore, etc., that will suddenly be made available.
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Mr. G
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34 Comments
Mar 30 11:47 AM-
TN hick
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20 Comments
Mar 30 11:51 AMchistletoe - that's $5/bbl (for 2-gallon barrel), get with the program
User 167026 - DO NOT put all your nest eggs in one asset basket (and cash, or FDIC-insured MM, is a position)
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Donald Johnson
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181 Comments
My Website
Mar 30 11:57 AMI'm expecting drops in demand more than increases in supply, which don't seem likely in most markets over the next 12 months.
Bulls tout growth in China and India, but even growing economies go through corrections and recessions. Consumption can boom only so long before consumers over extend themselves and pull back, often for a few years before growth resumes.
What's hard to calculate in these markets are the future of the dollar and how speculators in ETFs and hedge funds will react to the inevitable swings in demand and the unexpected. We have a lot of traders playing with other people's money, not their own, and they are more likely to take big risks than people who are trading for themselves.
In many ways, the ETFs are the public, the dumb money. But in other ways, ETFs are like commercials in that they have sophisticated computer models and traders. The question is, are they alumni of Cargill and ADM or of Bear Sterns? I kinda doubt the former and fear the latter.
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dilettantedude
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14 Comments
My Website
Mar 30 12:05 PM-
NOWHEREMAN
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1499 Comments
Mar 30 12:07 PMLook for a major jump in commodity prices in conjunction with a continued dive in the US currency. Barron's Covers are notorious, over time, for being incorrect in their assesment of a change in sentiment.
If you have a Bear on the cover, the Bear market of the time is almost over, ditto a Bull. Nothing has changed, Barrons is a contrary indicator at best.
Bullish/bearish analysis of favorable vs unfavorable stories on various companies during the year are never tabulated to see if the analysis was correct.
Because the same people continue to work at Barrons year after year translates into No One Else wants them. Just because a stopped watch is correct every 24 hours, doesn't mean it is useful.
I personally like Barrons. I like the way they put together their Market statistics. I like having the facts about the previous week summarized in a cohesive manner. Abbleson can make it on his own but many times he is years early. I have read his commentaries for over 30 years. His insights are really informative but he is not always right.
What happens to commodity prices when the US accelerates out of a recession? Do they go down because of strenghtening US currency or up regardless because of an increase in the usage of dwindling supplies?
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Donald Johnson
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181 Comments
My Website
Mar 30 12:27 PM-
mkreisel
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308 Comments
Mar 30 01:01 PM- Their productivity can increase very fast;
- They are too dependent on weather, which is completely unpredictable;
- DBA has already exceeded position limit imposed by CFTC.
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frflyer
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140 Comments
My Website
Mar 30 01:41 PMAnd the cost of continuing to do what we are doing is ruining our economy. Switching to alternatives will end the estimated $800 billion in annuall hidden costs of oil. Instead of giving the oil companies and estimated $80 billion annually in tax credits and subsidies, we could be investing in something with a future. And solar and wind and other clean energies won't cause wars in the mideast costing trillions of dollars and thousands of GI lives.
I you were paying for the hidden costs of oil at the gas pump, the price would be approaching $12/gallon.
The Greenies are way smarter than you are. They aren't burying their heads in the sand.
Nuclear power has many problems and is also heavily subsidized, certainly more so than alternatives.
"Federal subsidies to new nuclear power plants are likely between 4 and 8 cents per kWh (levelized), and could well be the determining factor driving the construction of new nuclear power plants. $9 billion per year in the U.S.
2006 from www.earthtrack.net/ear...
Is nuclear safe from terrorist attacks? Argonne National Lab doesn't think so.
"A report from Argonne National Lab concluded that aircraft crashes could subject nuclear plants to numerous multiple failures that could lead to "total meltdown" even without direct damage to the containment structure."
And nukes don't make us energy independent.
"We import 65 percent of our oil, but 90 percent of our uranium. At a time when state and federal leadership has set goals for "energy independence," reliance on nuclear power would mean depending on technology that requires fuel imported from overseas. Moreover, according to MIT scientists, there is less global supply of enriched uranium than commonly projected and the price has increased more than tenfold over the last five years."
"The United States and Russia signed a deal that will boost Russian uranium imports to supply the U.S. nuclear industry, the Commerce Department said Friday…."
The new agreement permits Russia to supply 20 percent of US reactor fuel until 2020 and to supply the fuel for new reactors quota-free."
So if, under a President McCain, we build a bunch of new nuclear reactors -- they could be fueled 100 percent by Russia."
"I can almost hear Vladimir Vladimirovich Putin saying, "Excellent." "
from: gristmill.grist.org/st...
they aren't cheap
"Estimates of the cost to construct nuclear power plants are as high as $4,000 per kilowatt, as compared to about $1,400 per kilowatt for wind projects."
They are expensive to dismantle.
"Nuclear plant owners are responsible for costs to dismantle retired units, dispose of waste, and decontaminate the site. Each unit has its own decommissioning trust fund, paid for by customers. Wisconsin ratepayers have spent $1.5 billion for the eventual decommissioning of the Point Beach, Kewaunee, and Genoa plants."
disposing of the waste is expensive and dangerous
"Part of our electric rates go to payments to the federal Nuclear Waste Fund, which is intended to fund the construction of the Yucca Mountain repository in Nevada and pay for transportation of waste to the proposed disposal site. To date, Wisconsin customers have paid about $600 million into this fund."
That's just one state.
And there is no accountability
"The nuclear industry has long enjoyed limited liability for nuclear accidents under the Price-Anderson Act, which ensures that taxpayers, not industry, will pay for damages in the event of a serious accident."
www.cleanwisconsin.org...
And here's an example of what solar can do. and do it without any of the dangers of hidden costs of nukes and oil.
Yes alternatives need subsidies to get up to scale. So far they are miniscule compared with the subsidies for competing fuels.
Scientific American A Solar Grand Plan
www.sciam.com/article....
"Solar thermal power plants such as Ausra's generate electricity by driving steam turbines with sunshine. Ausra's solar concentrators boil water with focused sunlight, and produce electricity at prices directly competitive with gas- and coal-fired electric power."
"Solar thermal power plants can store energy during daylight hours and generate power when it's needed. Ausra's power plants collect the sun's energy as heat; Ausra is developing thermal energy storage systems which can store enough heat to run the power plant for up to 20 hours during dark or cloudy periods."
"Solar is one the most land-efficient sources of clean power we have, using a fraction of the area needed by hydro or wind projects of comparable output. All of America's needs for electric power – the entire US grid, night and day – can be generated with Ausra's current technology using a square parcel of land 92 miles on a side. For comparison, this is less than 1% of America's deserts, less land than currently in use in the U.S. for coal mines."
www.ausra.com
blogs.business2.com/gr.../
And go to Green Wombat to see what's already happening in California with solar thermal power plants
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frflyer
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140 Comments
My Website
Mar 30 01:44 PMwww.setamericafree.org...
www.monitor.net/monito...
www.progress.org/2003/...
www.eoearth.org/articl...
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pseydocyst
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20 Comments
Mar 30 02:10 PMand buy financials and their toxic waste paper.
what great advice
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Gary Meade
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27 Comments
Mar 30 02:36 PM-
gogogo
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2 Comments
Mar 30 02:38 PM-
Kunst
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781 Comments
Mar 30 02:45 PMDUG: Ultrashort Oil/Gas
SMN: Ultrashort Basic Materials
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man
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1 Comment
Mar 30 03:07 PM-
AL Berta
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6 Comments
Mar 30 03:14 PM-
leh
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165 Comments
Mar 30 03:37 PMGold and oil have obviously been running much longer than that, but the fundamentals for both IMO remain as strong as ever, especially oil. Anyone who doubts the case for peak oil at this point should buy a house from Kunst--if the bank hasn't repoed it by now. The world will consume every produceable drop of the stuff for a very long time--and at higher prices than we can imagine today.
Gold needs a bit of a rest now after it's latest run, but since when is a routine technical consolidation considered a "collapse"? CNBC and its touts truly look like fools when they throw these words around so carelessly, and I've been amazed at the Cramer/Kudlow dog and pony propaganda show lately in which they try to talk the US stock market higher. They're emitting a distinct air of desperation lately, and Kudlow's looking the bigger fool by the day IMO.
And with the fed all but turning the dollar into play paper and staglation rearing its ugly head, I see only strength ahead long term for gold, but exited a position in FSAGX a couple weeks ago when gold looked ready to roll over.
Much of the conflict here in sentiment has to do with different timing windows, with Barron's usually representing the LT investor vs the ST/IT trader. In this particular case it appears Barron's is trying to give trading advice to investors, which is a bit screwy. Either way, I still think they're wrong to be calling an end to this bull when it's just gathering some steam for a massive multi-year run.
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rbblum
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49 Comments
Mar 30 03:43 PM-
Jersey
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57 Comments
Mar 30 04:03 PM-
Euroguy
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1 Comment
Mar 30 04:51 PMYou Americans yell a lot about high commodityprices and bullruns...
It's all about your money, the US$ have headed way south fast!!
Can't say we feel any heavy bull in let's say... gold. From €500 to €590 thats 18% in one year. And 18% can I see as normal because a lot more Indians and Chinese got a lot more money to spend now.
High prices are here to stay you just have to make sure you have a strong currency.
Regards // J