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In March, Barron's warned that the commodities bull market looked toppy. In September, it warned of a "further weakening" in the "forces that caused commodities to be overbought," which it warned "could turn into a rout." It did.

Prices are down 53% from their July 3rd peak, which many blame on the weak global economy. Perhaps, Barron's says, but the previous commodity bear happened amid the economic boom of the 1990s. More likely is that the burst bubble when 'hot money' - i.e. index funds "marketed to naive investors who were persuaded that commodities are in a permanent long-term bull trend" - put on the brakes. Analyst Steve Briese notes that index funds' stake in commodities peaked at about $250B; as of Nov. 4 their holdings stood at about $100B - a combination of liquidations and the overall price decline.

Meanwhile, Briese notes, commercials, a.k.a. 'smart money,' were massively short as early as March, and have been steadily covering their short positions as prices decline. As of last week, the value of their short positions is 4/5 the size of their longs.

So is it time to get back in? Maybe not. "The retreat of the index funds shows no signs of abating," Barron's notes. Pools still account for about 30% of the long commodity open interest, down from a high of 40%. Briese's initial analysis predicted a decline that could push prices down another 20%.

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While conceding that "exuberant speculators caused many commodities prices to reach overbought territories," Scott Wright argues "there is no denying that it was the fundamentals that provided a solid foundation for the run on commodities." Financial media, he says, has continually called the end of the commodities bull, and have been wrong every time. Is this time different?

Source: Commodities Still Have Downside - Barron's