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Nickelless
Administrator
USA
5580 Posts |
 Posted - 05/23/2008 : 05:22:17
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This was on the front page of the business section in Thursday's USA Today:
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By John Waggoner, USA TODAY
Potash (POT) isn't what you would call a glamour stock: It makes fertilizer. Nevertheless, the stock has soared 203% the past 12 months.
The world isn't running short of potash. At current consumption rates, there's enough to last 300 years, according to the International Fertilizer Industry Association. But there does seem to be limitless optimism about future fertilizer use — as well as the upward spiral in the cost of potash itself, up 150% over the past 12 months.
It's not just potash. Across the board, commodities prices are soaring. On Wednesday, light sweet crude oil closed at $133.17 a barrel, more than double the price 12 months ago. Overnight it topped $135.
Commodities are the first growth industry of the 21st century. The prices of energy, basic metals and foodstuffs have soared, and so, some say, has speculation. This year alone, cocoa is up 40%, copper has soared 24%, and corn has risen 33%. And the price charts for some commodities are beginning to look suspiciously like the Nasdaq fever line in 1999, just before the tech-laden stock index crashed in March 2000. And, as the economy continues to work through the more recent crash in home prices, the question inevitably arises: Is there a commodities bubble brewing?
Possibly, say many experts.
"Certainly, we're seeing a lot more interest (in commodities) across the board," says Barry Cronin, chief investment officer at Taylor Investment Advisors, a Greenwich, Conn., money management firm. "There's no mistaking that there's a significant amount of speculative money in the market." But is it a bubble? "That's the $100,000 question," Cronin says.
Price bubbles involve irrational behavior by investors drawn to the prospect of quick profits. But such manias aren't entirely measurable. There's no magic indicator that flashes bright red when a reasonable investment trend suddenly becomes unreasonable. Instead, you have to look at several different ways to measure bubble behavior. By those measures, the bubble in commodities is forming, but it's not at full froth.
Nevertheless, new signs of commodities mania keep bubbling up. The basic sign is a near-vertical rise in prices, says Ben Inker, director of asset allocation for the GMO funds. "If you look at the way oil has been moving lately, it's almost inconceivable that there is information about the future supply and demand of oil that's driving this," Inker says. "It cannot be the case that, relative to three weeks ago, we have information that would make the price of oil go up that significantly." The price of a barrel of light, sweet crude oil has soared 17.4% the past three weeks.
And Wall Street, for one, thinks that the market for commodities is hotter than the market for stocks.
Responding to price run-ups, the mutual fund industry has in the past 12 months rolled out dozens of commodity-related exchange traded funds, with tickers such as MOO— a fund that specializes in agricultural stocks. Others include a coal fund, KOL, and a raw materials fund, RAW. The funds typically invest in commodities futures contracts and have attracted billions in new investments the past 12 months.
Top financial exchanges
The world's largest financial exchange company as measured by market capitalization is no longer NYSE Euronext (NYX), which deals in stock trading. It's the CME Group (CME), formed from the merger of the Chicago Mercantile Exchange and the Chicago Board of Trade. The CME now has a market capitalization of $25 billion, vs. $19 billion for NYSE Euronext. CME averaged 10.2 million futures contracts a day in April, up 30% from a year ago.
Assets in managed futures programs, limited partnerships for the wealthy that invest in futures, total $218 billion and are up 6.3% this year, according to BarclayHedge, a Fairfield, Iowa, company that tracks hedge funds. True, $218 billion is minuscule in comparison with stock funds, and not all managed futures programs are in commodities. But assets in managed futures pools are up 474% from 2000, when they had just $38 billion. And interest in commodities is "at a level I've never seen before," says Sol Waksman, president of BarclayHedge.
Pension funds and other big, institutional investment pools are starting to pour money into commodities, too. Calpers, the California public pension fund, announced in March that it's devoting $1 billion to commodity investments, up from $450 million in past years. It's part of a long-term, inflation-linked strategy, spokesman Clark McKinley said.
Unlike the wealthy investors who choose actively managed commodity pools, pension funds and other public entities tend to prefer passive, indexed investments. Index funds have no manager and simply follow a commodity index, such as the Standard & Poor's GSCI Commodity Index (GSG)— the index that most of Calpers' commodity investments follow. The index soared 18.7% this year through April.
Individual investors, too, are choosing commodity index funds. PowerShares DB Agriculture ETF (DBA) has seen $22.5 billion in new money flow through its doors the past 12 months. Investors poured $1.2 billion into its more diversified twin, the PowerShares DB Commodity Index ETF (DBC).
Until commodity ETFs came along, average investors were largely excluded from the commodities markets. "It's not just for the ultrahigh-net-worth investor anymore," says Robert Maroney, principal at Connecticut Investments, an investment advisory service.
In fact, the mutual fund industry has rolled out 52 new exchange traded funds that invest in diversified commodities, energy or precious metals in the past 12 months, according to industry tracker Morningstar.
That's rarely a good sign: Fund companies are notorious for rolling out many sector funds at the top of a bubble. By the time fund companies identify a trend, put together a fund and get approval from the Securities and Exchange Commission to sell shares, the trend is often on its last legs. For example, the fund industry rolled out dozens of new Internet and technology funds in 1999 — just before the tech bubble collapsed.
Every bubble starts with a rational investment thesis and, in this case, it's the roaring economies of India and China, whose voracious appetites for steel, copper and oil have been pushing up the prices of raw materials. Improved diet and nutrition in emerging markets, as well as U.S. mandates for biofuel use, have driven up the cost of food. And India and China seem to be in the throes of a wage-price inflation cycle. China's inflation rate rose to 8.5% the past 12 months ended April, vs. 3.9% in the USA for the same period. India's inflation rate rose to a 3½-year high of 7.6%. Wages in both countries have skyrocketed. As a result, the prices of Chinese imports — long an important method of controlling price inflation here — have started to rise sharply.
Normally, whipping inflation is a job for a nation's central bankers. They push up interest rates to slow down the economy and cool off demand, shutting down inflation. But most central banks are doing the exact opposite.
China and many of the oil-rich Persian Gulf states, for example, have been buying dollars — and to do that, they have been creating money. "The Saudis and the Chinese have flooded their economies with their own money," says Paul Kasriel, chief economist for investment bank Northern Trust.
And U.S. central bank policy, at the moment, is aimed at avoiding recession, not taming inflation, says David Wyss, chief economist for Standard & Poor's. The Federal Reserve has pushed its key short-term fed funds rate down seven times since September, to 2%, its lowest level since 2004.
The question, then, is whether the rush of money into the commodities markets has helped push prices higher than they would be otherwise.
Lucjan Orlowski, professor of economics at the John F. Welch College of Business at Sacred Heart University in Fairfield, Conn., thinks so. "Without a doubt, that's propelling prices," he says. For example, Orlowski estimates that, given current supply and demand, a barrel of oil should cost about $70 a barrel.
But others, including the Commodity Futures Trading Commission, the government agency that regulates the futures markets, argue that many commodities that have no futures trading whatsoever — such as durum wheat and hay — have risen sharply, too. So speculators in the futures markets may not be responsible for all the gains in commodities.
The answer to the bubble question, at least for now, may be somewhere in the middle. Craig Caudle, a principal at Liberty Funds Group in Dallas, says only crude oil has reached its inflation-adjusted high. So he doesn't think that wild-eyed speculation has set in yet.
But he does see the impact that big money flows are having on the commodities markets. Normally, financial advisers recommend commodities because they aren't closely correlated with stocks and bonds. And, in fact, many commodity prices move independently of each other: Wheat doesn't necessarily rise when oil does, for example. Putting 5% of a portfolio's assets into commodities tends to reduce the portfolio's overall volatility.
Because many institutional investors are pushing money into commodity indexes, however, many commodities are starting to move much more in lock step, Caudle says.
The cure
If inflation is the root cause of a potential commodities bubble, the cure is fairly simple. Central banks have to raise interest rates to slow economic growth. Already, the futures markets are predicting a quarter-point increase in the fed funds rate by the end of the year as the Fed turns its attention from warding off recession to fighting inflation.
Unfortunately, the Fed can't do it alone. "The Fed can't control what's happening outside the U.S.," says Wyss. As long as the global inflation cycle remains intact, prices could continue to rise. And as long as prices rise, money will continue to pour into commodities, pushing prices yet higher.
Should world central banks act in concert to end the commodities bubble — if indeed it is a bubble — the end may not be pretty. In the commodities markets, you can make as much money by betting on falling prices as you can by betting on rising prices. All commodities traders really want is a clear trend: They don't care whether it's up or down.
Investors got a taste of the volatility of the commodities markets in March, when gold soared to a record $1,011.25, then swooned to a low of $871 in April, a 14% plunge. Should a world economic slowdown turn commodities prices down, they could fall faster and harder than many investors expect.
And, because the cure for inflation is a slower economy and higher interest rates, there's always the danger of global recession. Still, says Orlowski, the cure is better than inflation. Higher prices mean real suffering for the world's poor, who are struggling to cope. "The futures bubble means a transfer of real income from the poor to the rich," Orlowski says.
If unchecked, he says, "It will have very profound political consequences across the globe."
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Ardent Listener
Administrator
USA
4841 Posts |
Posted - 05/23/2008 : 09:51:46
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It depends on the commodity as to how much of a bubble, if any, it currently is in. I don't consider the base metals to be in a big bubble now but that's not to say speculators aren't involved with it. I'm surprised gold and silver aren't even higher. But I don't think it's the goverment or central banks that are holding them down. Simply put, most investors just aren't as intersted in them as most of us are now. Give them some time and they too will turn around. Oil on the other hand is being pushed up mostly on speculation now IMO.
But sure, if the world goes into slow or no growth so will the commodity markets too. |
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Think positive. |
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silverhalide
Penny Sorter Member
92 Posts |
Posted - 05/23/2008 : 11:33:43
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I think about half of the base metals are in a major bear market already. (Look at zinc lead and nickel). The only metals holding up are ones that are in short supply like ferrochrome (which is due to concentrated production in SA and recent power constraints) or have a connection to electricity like aluminum and copper(energy).
I also think this spike in oil prices will have the same effect as raising rates. |
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redneck
1000+ Penny Miser Member
1273 Posts |
Posted - 05/23/2008 : 11:47:22
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But I don't think it's the government or central banks that are holding them down. Simply put, most investors just aren't as interested in them as most of us are now.
Ardent Listener
And yet there is Real shortage in terms of receiving orders of Gold & Silver from the major supply holders....? (weeks to months)
There seems to be lots of demand but little supply.
Something there does not smell right.....
Gold and Silver ALWAYS mirrors OIL....
Seeing thats not the case,I suspect there's manipulation in the market.
Remember Gold & Silver are seen as indicators of inflation,thus need to be controlled.
Gold & Silver are the only real currency,that is why the manipulators prefer Fiat money
that can be produced at will to achieve the desired effect of Boom & Bust Cycle (bubbles).
These bubbles did not exist before the creation of the FED.
None of this is possible without the approval of Government and the unseen hands that guide them.
In the words of Henry Kissinger:
"Control oil and you control nations;
control food and you control the people."
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Saul Mine
Penny Collector Member
USA
343 Posts |
Posted - 05/24/2008 : 01:24:18
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quote:
Price bubbles involve irrational behavior by investors drawn to the prospect of quick profits.
Mr. Waggoner is obviously a doodiehead and we can safely ignore anything he writes. A bubble only exists when there is something to inflate it, which means banks creating money and loaning it for only certain purposes. I would expect a reporter to know that as a matter of checking his facts. Or in this case, checking his clichés. |
A penny sorted is a penny earned!
Please use tinyurl.com to post links. Long links make posts hard to read. |
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tmaring
Penny Collector Member
USA
302 Posts |
Posted - 05/25/2008 : 09:25:41
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A "bubble" would presumably indicate a coming collapse in value. If you believe in "buy low, sell high" then that would indicate a selling opportunity. But... if the dollar is tanking, what do you sell for? Euros? Drachmas? Yuan?
As long as the population continues to grow, commodities and real estate will continue as sound investments. But... when TSHTF... then there will unavoidably be a lot of deaths, and a lot of unoccupied real estate... commodites OTHER THAN food and necessities will only have value as related to their ability to help acquire those necessities. A hundred pounds of copper AS WATER PIPE will be worth more than a hundred pounds of copper bullion. A ton of steel AS SHOVELS, RAKES, AND HOES will be worth far more than a ton of steel ingot. An ounce of antibiotics will be worth ten times its weight in gold if you're child is sick.
As long as population continues to grow then demand will not slacken much... there may be bobbles... but no true bubble. When we start seeing massive deaths from epidemic or starvation, then look out. |
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pencilvanian
1000+ Penny Miser Member
USA
2209 Posts |
Posted - 05/25/2008 : 11:03:03
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Bubble, truly defined, is when the talking heads say things such as
"it has nowhere to go but up"
or
"can't miss investment"
Metals, base and precious, in fact all commodities are not at this point yet. What are the shills pushing on business programs? Stocks, bonds, paper investments. They only mention the metal ETFs on occasion, but even then they are talking of paper gold and silver, not the real thing.
All investments have their time in the sun, but none go up forever. Real estate is taking a beating in most places, some say the bottom for houses won't happen until 2010 or 2011. Just a few years ago houses were considered the 401k for the masses, a lottery ticket that was a gauranteed winner. Those who only saw dollar signs and discounted or ignored the risks and bought more house or houses than they could afford, are now facing foreclosure, bankruptcy or both.
The metals are not in decline, the demand is real, but to hold onto metals too long will end up costing you dearly. There will be a time when I will sell my metals for more than I paid for them. When will that be? When Time, Newsweek, Business Week and the talking heads are all singing the priases of metals and commodities. At that point it will be time to sell off and fast.
Where to put the profits once they are made?
That is the question. The answer is to buy what the market hates and sell what the market loves. In a few years buying real estate when sellers and banks are desperate to get rid of it or buying Swiss Francs or the Iceland Krona might be a good idea (Yes, I know the Swiss Franc & Iceland Krona are fiat, but not all fiat loses its vlaue at the same rate. A currency that is percieved to be strong, or at least not weak, will be the currency to hold.)
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Edited by - pencilvanian on 05/25/2008 11:06:27 |
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Is there a commodities bubble brewing?
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