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May 10, 2011, 1:06 p.m. EDT
By Keith Fitz-Gerald
BALTIMORE (MarketWatch) "” Commodities are plunging across the board in response to the latest U.S. data, most of which seems to suggest that the American economic recovery is waning.
Oil /quotes/comstock/21n!f:cl\m11 CLM11 +1.30% , which traded down to $94.63 on Friday, was particularly hard hit, which is why so many suggest the commodities bubble has met its end.
Don't you believe it.
Commodities prices will be back. In fact, 12 months to 24 months from now, gold, silver, and other commodities will be trading at higher prices than they were just a few weeks ago -- when they were trading at record levels.
Though you may be surprised by my predictions, I have to confess that this isn't rocket science. Several clues point the way. For instance:
Global demand is still rising and in the "BEE" markets (Big Emerging Economies), demand is advancing well ahead of the global averages.
We're using four barrels of oil for every one we're discovering, and unless you've got a few million years to wait, Mother Nature isn't going to bail us out any time soon.
Alternatives for energy-related commodities -- and particularly oil -- are few and far between. For instance, there are more than 60,000 industrial processes that depend on petroleum-based products, which is why even the most aggressive scientists think it could be decades before substitutes are robust enough to actually reduce oil demand. And that's assuming a perfect substitute is found today. See Oil Consumption Demand Destruction Vs. Speculative Futures Positions
The way I see it, the situation we face in the world today is like a thousand people trying to buy the last egg in the grocery store: Prices have to go up.
That brings us to last week's so-called "pit panic." Here, too, there were clear catalysts and logical reasons for the actions that traders took as they drove prices into the basement. For instance:
Many traders are simply taking profits. That's what they do and it's how they are bonused, which is why none of them want to be the last one to leave the party. This places downward pressure on prices. Other traders -- who are running high-margin/high-return strategies -- are simply liquidating hard assets (including oil) in the face of rumored regulatory changes that would radically elevate their margin requirements just as very similar margin changes took the steam out of silver's sails last week. (The Chicago Mercantile Exchange (Nasdaq: CME) has raised margin requirements on silver contracts five times this month alone.) Ironically, this panic began in the silver pits. And that implosion of silver mania subsequently spread to such commodities as oil and copper in the last few days. This illustrates the interconnectivity of financial markets that I frequently talk about.
There's perhaps a bit of a "fear premium," even though the Middle East has not gone up in flames and oil is still flowing. Frankly, I think there's a bit of this at play, but it's not a huge factor.
Oil is traded in US dollars, which means that as oil goes up, the dollar is typically dropping. But traders seem bent on driving oil prices down, which may signal a much darker possibility: These trades may be presaging an attack on US debt that is akin to the attacks on the government liabilities of Greece, Ireland, and Portuguese during the past few months -- and these attacks sent yields up sharply. This is not unlike actions taken by the bond vigilantes of the 1990s who actively sold Treasuries as a "protest" in an effort to drive rates higher and bond prices lower. This time around, though, I think currencies themselves are the weapon of choice. See also: Eurozone Watch: Luxembourg "Secret" Meeting Returns Sovereign Debt Crisis to Front Pages
There are other reasons why this so-called commodities bubble isn't finished -- not by a long shot.
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"GM to invest $2 billion in U.S. facilities http://on.mktw.net/jr5ofS" 12:33 p.m. EDT, May 10, 2011 from MarketWatch
"'Digits' features analysis of Microsoft-Skype deal and more 14 watch it now http://on.mktw.net/l8zqUy" 12:05 p.m. EDT, May 10, 2011 from MarketWatch
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