Thursday, May 22, 2008

Commodities bubble set to burst


Jed Clampett struck crude in his backyard while a hunt'n and he ended up living the high life in Beverly Hills and lived a very happy life with Jethro and the whole clan. He would have been even wealthier today.

As we speak, the price of Nymex crude futures is US $134.40 a BBL, LME copper futures are US$8299 a metric tonne, wheat futures US $787 a bushel and a whole host of the worlds other commodities: gold, steel, aluminum etc are at record prices and show little sign of slowing down their upwards trajectory.

Sure, much of the reason why these commodities keep climbing are because of unprecedented demand from the likes of China and India and the use of soy, maize and other food crops to make Bio-fuel, are having an impact on food prices but one cant underestimate the effect speculators and traders are having on commodity prices.

At just shy of US$135 bucks the oil price has far outstripped the upward pressure that pure demand would put on it and just like any other bubble, the commodity bubble is inevitably going to burst.

When is not clear but just like the stock booms of the past, the tech bubble of 2000 and the current real estate collapse, what goes up inevitably comes down. It would simply defy history for this not to happen.

So what is the problem? you might ask. Well the big headache will be that this sector of the investing market is now getting manifold increases in money being invested; by individuals, hedge funds, banks, pension funds and all the other derivative, bond holding, debt laden fund raising schemes(that I don't completely understand) that were involved in the Sub-Prime mortgage sector.

This wouldn't be so bad if the direct investors were the only ones burned when things go pear shaped but as we know these things have a tendency to effect the real economy and therefore the average man on the street.

These speculators have bailed from the stockmarket and real estate and are now creating another bubble that will burst like Elle May Clampet out of her gingham top.

The consequences of a commodity bubble bursting though will be a whole lot less attractive than Elle May's d├ęcolletage.

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