Are We Nearing a Top in Commodities?

by: The Stalwart

If the financial newsmedia could be said to have a bias, it would be "pro-stock", writes The Stalwart. It's not that the media is always bullish, but that stocks get a far greater share of business coverage than other asset classes. There are some obvious reasons for this that aren't worth getting into. The upshot is that others, like bonds and commodities, only get significant coverage when they're making dramatic tops and spikes. They can go on a multi-year bull-run and not get coverage. Oil, is an exception of course, owing to the fact that consumers see its price change directly in the form of gas prices.

This weekend, the media turned a glowing shade of yellow, as gold made 18-year highs. But gold and oil aren't the only commodities making highs right now. A complete range of commodities from copper to cadmium and nickel all have had astounding runs over the last few years. Like every bull-run, there have been naysayers and doubters proven wrong all the way up.

Have we reached a top?

In order to answer that question, you need to have a theory about why they've run up. Many would point to growing demand in China, and others would say we're starting to deplete the worlds resources, or at least the low-hanging fruit, i.e. the stuff that's cheap to produce. I subsribe to the simpler explanation that the run-up in commodities is based on the same factor as the run-up in housing prices: Alan Greenspan's cheap money policy.

One of the the truisms of economics is that price-controls don't work. If you try to lower the cost of something below equilibrium, you end up paying for it elsewhere. (Typically price controls result in shortages, but when it comes to money, governments seem to have a limitless supply of the stuff) So, you lower the cost of money, and the cost of economic inputs from land to energy rise rapidly. Were it not for the deflationary pressure of Chinese labor, wage inflation would have likely grown as well. Commodities have now been on a bull-run for several years, and only in recent days has it got any news.

Imagine if instead of a run in cobalt, uranium and cadmium, it had been a run in MSFT, GE, and GM. Your cab-driver would know the latest quotes, the level of the Dow and probably even the Wilshire. Everyone on CNBC would be a celebrity again, and newspaper headlines would read "Retire Rich Yesterday!". Imagine the jubilation there would have been on monday when the CRB commodities index rocketed 3%!

I came across a nice quote on a day-trading blog recently: In the initial stages of a bull market, the bull's goal is to shake out the weak hands and take the minimum number of investors along with it. In the latter stages of a maturing bull market, the bull's goal is to suck in all the late comers and take them to the slaughter house. With Alan Greenspan raising rates yet again today, and signaling that there are certainly more to come, it feels that the gains these days could be from all the late comers about to go to the slaughter house.

With interest rates nearing what economists believe to be equilibrium the groundwork which set the stage for the bull market is nearly gone. There is a growing sense, like with the internet stocks in early 2000, that you gotta get your gains now because the party is almost over. Hence the dramatic gains, based on little economic data.

Of course, it could still be that China will lift prices of commodities to the moon, or that we'll run out of oil tomorrow. But I believe the Fed explanation is elegant, and we could be nearing a commodities top very soon.


« Any opinions expressed on the Seeking Alpha sites are those of the individual authors and do not necessarily represent the opinion of SeekingAlpha or its management. »