I am on record as a long term bull on commodities. The near term risks that I see for this trade are:
- Cyclical: A US slowdown will spread to the rest of the world and reduce cyclical commodity demand
- US$ rally: A countertrend rally in the US$ will create headwinds for commodities
Cyclical risks are abating
A look at some real-time indicators for the world economy shows signs of stabilization and recovery. Dr. Copper, which is an indicator of world cyclical demand, is at or near new highs. The Baltic Dry Index, a shipping cost benchmark, fell from all-time highs in 3Q 2007 and has stabilized (see the chart here, click on the BDI & Copper link to see the two together).
While I continue to be concerned about a counter-trend rally in the US Dollar as the US economy shows signs of recovery later this year, the cyclical risk in the commodity trade is greatly lessened.
As an investor, I would be inclined to raise from an underweight to a neutral position in the commodity sensitive plays in my portfolio.