What is the driving force behind the surge in commodities? If it's a supply and demand issue than the rally in gold, oil, and agricultural companies like Monsanto (MON) and Agrium (AGU) is for real. If not, than this rally won't last.
Daniel Dicker, a contributer on www.thestreet.com and a well respected floor trader of oil for 25 years had this to say:
let me be clear -- fundamental arguments cannot account for this tremendous up move in oil and other commodities -- and don't be fooled by those who would try to convince you otherwise... At the end of 2007, Nymex reported average daily volumes of 1.485 contracts per day, an increase of 25% over 2006. So far in 2008, growth has continued at an astronomical pace: January volumes increased 6% over the same period in 2007, February was up 28% and March increased an astounding 62%. We don't need to be geniuses to recognize where most of this growth is coming from... it all represents an enormous increase in flow of speculative trade... the speed of global growth, as compelling as it is, is just not sufficient to explain the 60% rise in price last year and the more than 20% rise we've seen so far this year. As my old trading mentor used to tell me, 'In an up market, all news is bullish.'
He's right -- analysts are forced to find reasons to fill time on CNBC every day for the inexorable rise of the crude barrel and reach for fundamental reasons that are simply insufficient. Just take a look at the crude curve -- the representation of how the market feels crude will be trading one, two and three years from now."
Investing 101 teaches that such speculation leads to a bubble and all bubbles burst. Commodities are experiencing their bubble. It is expected that next weeks Fed meeting will be the beginning of the end of interest rate cuts. Prior cuts have led to bubbles in equities and real estate, this time it's been commodities. This commodity rally is based on market dynamics, the talking heads want us to believe that we have shortage issues but it just isn't true. I don't know of anybody who has experienced an actual lack of supply. This Earth is able to provide all that we need. Underpopulation might even be more of a problem than overpopulation.
If that doesn't convince you, try doing a simple Google search for the latest oil findings. There have been huge findings in the Gulf of Mexico, Southern Utah, Indonesia, and Brazil; all within a one year period. Does that sound like the makings of a shortage? I don't think so. In the absence of real supply problems, commodity prices will decline back to historic norms.
Of course it is difficult to time the bursting of a speculative bubble but a smart investor methodically averages in and waits for reality to claim false perception. My favorite play is the Pro Shares Oil and Gas Short (DUG). It ended Friday near a 52-week low of $30.66, its high is $59.21.