Warren Buffett Warns on Commodities

Speaking at Berkshire Hathaway Inc.'s (BRKA) annual shareholder meeting in Omaha, Nebraska, Warren Buffett warned that commodity markets have become overheated. Earlier this week, another famed value-oriented fund manager -- Bill Miller -- devoted his quarterly letter to shareholders to the same warning.

Investors wishing to act on Messrs. Buffett and Miller's views may consider shorting the gold ETF (GLD), silver ETF (SLV), US oil ETF (USO) or the DB Commodity ETF (DBC), which tracks a composite of six commodities: light sweet crude oil, heating oil, gold, aluminum, corn and wheat.

Here's the report on Mr Buffett's comments from the Wall Street Journal (paid sub. req'd):

Speculation has also begun to drive commodity markets, Mr. Buffett warned. The price of metals, such as copper, and other commodities like oil, initially climbed on fundamentals, but the gains have now attracted more investors betting on further price gains, he explained.

"What the wise man does at the beginning the fool does at the end," he quipped. "Once a price history develops enough for other people to see it and get envious, that takes over markets. We're seeing that some areas of the commodity markets."

The Berkshire chairman also warned that it could end badly, likening commodity markets to Cinderella at the ball. "At the start of the party, the punch is flowing and everything's going well, but you know at midnight it's all going to turn into pumpkins and mice," he said. "People think they'll be able to get out just before midnight, but everyone else thinks that too."

"The problem is that, in commodities there are no clocks on the wall," he added. Berkshire mostly avoids commodity speculation because Mr. Buffett said he's "not good at the game of figuring out how far the speculative gains will go." That means Berkshire won't make as much money as other investors who stay on until "the final 30 days or weeks of a wild orgy," he said, recalling a big investment Berkshire made in silver.