Is There a Commodity.com Bubble?

The commodities’ complex in general (aside from yesterday’s IMF-inspired bounce) appears to be bothered by poor-looking technical charts and by a generally souring mood. FCStone analyst Ed Meir commented that commodity speculators “In addition to worries about another potential flare-up (of debt issues) in the eurozone, markets are also watching developments in China with justifiable concern, given how prominent a buyer the country has become in a number of commodity markets over the years.”

While folks like Mr. Meir view the downturn in sentiment in the commodities’ space as “temporary” and others such as JP Morgan believe that, for example, a new copper ETF could imply a whole new level for demand for the orange metal, there are those for whom the current fondness for “stuff” spells real trouble, as in: “dot-com bubble” type of trouble.

In a blistering piece on The Atlantic.com site, Ruchir Sharma, Head of emerging markets at Morgan Stanley and a longtime columnist for Newsweek, the Wall Street Journal, and the Economic Times of India, says that we should all fear the commodities bubble. A lot. Here (in part) is why, writes Mr. Sharma:

“No bubble is a good bubble, and all leave some level of misery in their wakes. But the commodity.com era has had a larger and more negative impact on the global economy than the tech boom did. The hype has created a new industry that turns commodities into financial products that can be traded like stocks. Oil, wheat, and platinum used to be sold primarily as raw materials, and now they are sold largely as speculative investments.”

Mr. Sharma then goes on to note that:

“Copper is piling up in bonded warehouses not because the owners plan to use it to make wire, but because speculators are sitting on it, like gold, figuring that they can sell it one day for a huge profit. Daily trading in oil now dwarfs daily consumption of oil, running up prices. While rising prices for stocks – tech ones included – generally boost the economy, high prices for staples like oil impose unavoidable costs on businesses and consumers and act as a profound drag on the economy.”

Most importantly, Mr. Sharma (an Indian, to boot) identifies the principal culprits of such developments in the commodity space: the "gurus" who would like to convince us all that the “inexorable rise of China and other big developing nations will continue to drive a commodity super-cycle, a prolonged upward rise in the prices of commodities ranging from oil to copper and silver, to textiles, to corn, and soybeans.”

Such “experts” dole out generous helpings of fear laced with promises of riches and numerous Malthusian visions of the world. They would like to sell us hard on the idea that Chinese (or Indian) demand for “stuff” insatiable and that, thus, the sky is the limit when it comes to commodity prices. Mr. Sharma obviously disagrees and he points to those very urgings by cautioning that “the strongest common thread connecting the dotcom and commodity.com eras is the fundamental driver of all manias: the invention of "new paradigms" to justify irrationally high prices.”

Until Friday, do remain rational,

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About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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