Commodities Primed for a Bust?

What goes up must come down – especially when it comes to commodities.

Financial market participants generally turn most bullish when a bubble in their market is about to bust, and that may be the case for commodities now.

Rapidly developing economies across Asia and elsewhere are driving prices for food, energy and materials higher, but there is always an upper limit, followed often by a serious price crash.

Oil prices, for instance, have nearly quadrupled since President Bush declared victory in Iraq more than four years ago. Copper quadrupled during the five years through October.

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Wheat prices tripled during that period and now are soaring above record levels of $10 a bushel, double the price in January. Soybeans are up 75 percent and corn up 12 percent in that period – before serious demand for corn for biofuels kicks in.

Yet, oil prices fell below $10 per barrel in 1986, only six years after the worst decade of oil price increases in history.

Commodities across the board may soon face a similar slaughter. That is their history, notes Charles Dumas, global strategist for Lombard Street Research.

"The long-run real return on commodities is negative, except for oil, where it has been nil for one and a half centuries,” Dumas told U.K. daily The Telegraph.

That’s because people are adept at finding additional supply of commodities or substitutes for them when demand surges and supply shrinks.

"Smart investors have made huge profits at various times trading commodities,” Dumas acknowledges.

"The price cycles can be violent. But it is a tough, cyclical game fraught with risk. Portfolio positions can’t just be comfortably locked away,” he said.

Some commodities already have shown signs of weakness, according to the Telegraph report.

Copper has slipped 23 percent since peaking in early October, and lead has slumped 42 percent. Nickel has plunged 53 percent in just seven months.

While demand has surged in China and other emerging market nations, all that buying has sent annual inflation surging to 6.9 percent in China and 9.5 percent in neighboring Vietnam.

In the Mideast, inflation is jumping to precarious levels, as governments have gone on buying binges with their latest round of oil wealth.

Inflation is now beginning to show up in the developed world as well, just as housing prices are forcing an economic slowdown.

The housing meltdown already has put a clamp on U.S. economic growth, and the housing crunch has spread to Europe, where home prices rose earlier and higher in general. That too will force commodity prices lower – eventually.

A so-called "soft landing” is possible, although no economist thus far has made that call.

It’s hard to imagine how. So many new economies are hitting growth records at once, and the bubbles under the world’s big economies are so large, that the chance of a multi-country collapse is greater than ever.

Whether the world’s newest "big” economies can mesh their cycles into the developed world is completely untested, yet we are likely about to find out.

Already China has lifted interest rates and curbed credit to restrain rampant growth. It is highly unlikely that it and other emerging markets can sustain their double-digit economic growth rates without consequence, and their leaders know it.

Yet the inevitable slowdown of growth – presuming there is no crash – will pressure commodity markets in any case.

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