Get Out of Commodities: Barron's
Source: Seeking Alpha Editor, Eli Hoffman (3/29/08)
Barron's cover story notes commodity bull markets are being fuelled by retail speculators, while seasoned commercial players are betting on a downturn.
Here's the gist of Barron's short case:
The CFTC (Commodity Futures Trading Commission), due to the relatively limited capacity of commodity markets and the ease with which they can be moved, puts limits on the sizes of speculators positions. However, commodity ETFs, pools and mutual funds sidestep this limitation through complex deals that have them buying and selling off-market through a conduit called the International Swaps and Derivatives Association [ISDA]. The CFTC is aware of the situation, and is gathering on Apr. 22 "to hear firsthand from participants to ensure that the exchanges are functioning properly." An idea of just how deep-rooted the problem is: ETFs, mutual funds and commodity pools seem to account for a full 60% of all bullish commodity positions.
Commodity bull Jim Rogers notes that there are about 70,000 mutual funds in the world, and only about 50 that invest in commodities. He thinks the speculative bubble has a few years to go. But looking at the 'smart money' -- farmers and others who actually trade in and use the physical commodities -- tells a different story. Net commercial shorts are 30% higher than a previous record.
Factors that could burst the bubble:
Even the slightest hint of a China slowdown (much of the bullish outlook is due to the perception of an 'insatiable' China).
A U.S. recession...