In his recent letter to shareholders, Warren Buffett quoted a Silicon Valley bumper sticker: "Please God, just one more bubble.”
Well, that driver got his wish, but the bubble is in commodities this time around — not tech.
From wheat to gold to copper, commodity prices have exploded over the past five years. Many experts say a bust is imminent.
"We’re seeing bubble-like trading activity from speculators that has sent markets to levels that basic fundamentals probably don’t justify in the near term,” Bill O’Neill, former director of commodity research for Merrill Lynch and now a partner at LOGIC Commodity Advisors, tells MoneyNews.
Story Continues Below
Take the case of sugar. India has enough sugar to turn all its citizens into diabetics — more than 20 million metric tons in storage. Brazil has stepped up production amid the ethanol craze, exporting record amounts, according to reporting in the U.K. newspaper, the Daily Telegraph.
That’s a pretty strong case for falling sugar prices, right? But they have soared more than 40 percent since December — up to 14.18 cents a pound for the current month contract.
"Investors have made far too much of the link between sugar and biofuels,” commodity consultant Judy Ganes-Chase tells the Telegraph.
"We’ve had one massive surplus after another, yet people still keep planting more cane. Brazil is the only country where ethanol is actually viable in cars. Everywhere else is building up sugar stocks in mere hope.”
Of course, fundamentals do account for at least part of the gain in commodity prices. Demand for basic materials has surged in India and China as their economies experience explosive growth.
Every year, 73 million more people need to be fed. Production of oil, coal and other commodities has been interrupted in various spots by political and economic turmoil.
But that hardly seems to justify the more than 100 percent gain in the benchmark CRB commodity index over the past five years.
Some individual commodities have jumped a lot more than that.
Oil prices have quadrupled since President Bush declared victory in Iraq more than four years ago, wheat prices tripled during that period, and copper prices have quadrupled.
Helene Meisler, a technical analyst for TheStreet.com, points out that a graph of PowerShares DB Commodities, an exchange-traded fund that tracks commodities, for the period from December 2006 to the present almost exactly mirrors a graph of the Nasdaq Composite from the period of January 1999 until its peak in March 2000.
The tech-driven Nasdaq dropped almost 80 percent in about two-and-a-half years that followed as investors fled technology stocks looking for safe havens.
"If it looks like a bubble and acts like a bubble, chances are it is a bubble,” Meisler writes. "The only question is when it will pop.”
The key to the latest surge in prices is demand from investors trying to get in on the trend. Hedge funds and sovereign wealth funds are piling into commodities.
Even a conservative investor like the the California Public Employees’ Retirement System, the country’s largest pension fund, said recently it may increase its commodities investments 16-fold to $7.2 billion by 2010.
"We have seen a number of non-traditional players coming into commodities as an asset class,” O’Neill says.
While he, like others, sees commodity prices moving higher in the long term, he cautions that "it has gotten over-speculative now … and inevitably these things will come down.”
© NewsMax 2008. All rights reserved.
Editor's note:
Great Buying Opportunity Ahead for Real Estate. Find Out Where and When
Why Oil Prices Will Go Much Lower After November Election. Best Ways to Profit Now.
Financial Intelligence Report Stock Picks Soaring. Up 53% to 63%!
The Recession’s Silver Lining. What it Means for Investors.
Cash in on the Shocking Growth of Personal Debt
Which Stocks Should You Dump Immediately
Investors now urged to avoid the Euro. Find out why.
Why the Dollar May Have Hit Bottom. New Actions to Take Now.
Capture 10% to 15% Dividend Income Every Month
