Thursday, March 20, 2008

Is the Commodity Bubble Bursting?

I've said it before, Mr. Gongloff has as good a feel for markets as any journalist I've come across. I'm not sure if it was he or Mr. Patterson who wrote the instant piece, it's as timely as it gets.*
From the Wall Street Journal:

While trying to clean up the mess of one bubble this week, the Fed might also have unexpectedly hastened the end of another.

Oil, gold and other commodity prices have soared recently, much higher than what would seem to be fundamentally justified. They took a big tumble in the other direction yesterday, with gold posting its biggest dollar decline in 28 years and oil its biggest loss in 17 years.

One cause of the selling seemed to be Tuesday's interest-rate decision by the Fed, which didn't lower rates as much as markets expected. Moreover, in its statement accompanying the cuts, it spent a surprisingly large amount of time harrumphing about inflation risks. That seems to have eased concerns that the Fed was prepared to toss out its inflation-fighting mandate.

Hedge funds and other investors that had pumped cash -- much of it borrowed -- into commodities might now be having second thoughts. If the Fed is serious about fighting inflation and will be more reluctant to cut rates in the future, then the run-up in commodities prices might be running its course. Moreover, if the economy gets weak enough to damp inflation on its own, that's also poison for commodities, as it means slumping demand for oil, steel, wheat and other hard assets.

The deleveraging process gripping Wall Street is another important factor. If the downdraft in commodities prices continues, hedge funds and other traders that made bets on raw materials with borrowed money could be forced to sell their holdings and unwind those bets....CHARTS and more.

*Full disclosure: we've got a soft spot in our heads for Mr. Gongloff.
(okay mom, I used your line, will we have pie this weekend?)