Commodities Volatility Indicate Firming Demand, Rising Prices

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"Today, with demand firming and in the absence of relentless selling pressure, prices are rising."

In just the past two and a half weeks, the price of crude oil futures has risen from a low of $32.40 to a high of $50.50. That's a gain of 56%, yet crude is still down by two-thirds from its high of $147 last July. It's hard for me to believe that these wild swings are indicative of huge changes in the demand for, or the supply of, oil. Surely speculative activity and/or forced sales must account for some significant portion of the volatility.

We see the same pattern in a lot of commodities: after reaching significant highs last summer, prices subsequently plunged, but are now on the rebound. . .returning to some semblance of normality, having probably fallen to levels low enough to stimulate demand. Today, with demand firming and in the absence of relentless selling pressure, prices are rising.

This is good news on two fronts: one, it means that the plunge in demand that reverberated globally was more an "economic air pocket" than any genuine or lasting economic destruction. Consumers cut back on nonessential spending, and speculators were forced to sell positions to raise cash and pay off margin calls. It all happened in a relatively short period. Two, it means forces in the economy are beginning to improve. We've had massive price adjustments that have cleared markets, and now we can get back down to the business of working and making money.

The economy is most likely doing better than the market fears, but we still have to see evidence of that improvement. That might take at least a few months. But in the meantime I'm encouraged, and I'm not buying into the bears' chant that the current rally is a sucker's rally.

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