A variety of commodities appear to be overbought right now. There’s consumer backlash in markets such as copper and gasoline. Some commodities could see sharp price corrections, with rising interest rates accentuating any moves.

However, if my prediction comes true, I’d view this as merely a correction in a long-term commodity bull market--in other words, a buying opportunity.

The long-term bull market in commodities isn’t over because, as I’ve discussed for more than a year now, the fundamentals behind it aren’t going away anytime soon. Increasing demand from China and India, deficit spending by the government and an out-of-control trade imbalance will continue to weaken the US dollar.

Then there are those commodities still reasonably priced; some are even cheap based on demand considerations. I discuss some later, but let’s first focus on those that appear to be--at least temporarily--overvalued.

Overbought Commodities

While gold remains bullish longer term, it may have gotten ahead of itself. Open interest (the total number of outstanding futures contracts) peaked May 3 and has been declining on the last rally.

June Gold

I’ve often noted that open interest in a bull run will peak about two weeks prior to a top--on that basis we’re about there. How big a correction can we expect? Five to 10 percent would be normal; based on the recent high of $732, I wouldn’t be surprised to see a correction to somewhere in the $660 to $699 area.

When the smoke clears, it will be a buying opportunity.

Weekly Crude Oil

Longer-term bullish fundamentals remain intact for crude oil, but at least for now this one seems to be overheated; witness the media attention on sky-high gasoline prices, alternative fuels and Iran and Nigeria jitters.

The blue line on the weekly chart above is a one-year moving average. Note how, over time, if the market trades too far above this blue line it’s eventually drawn back into it. Based on this reasoning, it wouldn’t be unreasonable to see a move back to the mid-60s for crude. Such a correction would still be within a longer-term bull trend.

Weekly Soybeans

While this chart doesn’t appear to be high priced from a historical perspective, the most recent US Dept of Agriculture (USDA) report projected 2006-07 soybean stocks would be a record high 650,000,000 bushels, suggesting soybean prices are high in relation to this supply level.

Soybean prices have been dragged up recently in sympathy with the tide of the bullish commodity trend. I’d look for the bearish fundamentals to weigh on soybean prices in coming months. This assumes normal growing weather this summer--if any weather problems develop for the just-planted crop, all bets are off.

Undervalued Commodities

In the interest of full disclosure, as of this writing we have positions in corn, cotton and cocoa, but not cattle in my premium trading service Futures Market Forecaster.

Weekly Corn

Last Friday’s USDA crop report projected 2006-07 corn stocks at 1.14 billion bushels, 400 million bushels below what most analysts expected. The USDA based this supply reduction on lower planted acres, good export numbers and a major new demand source, ethanol.

The use of corn for ethanol production will only grow in the coming years; I have no argument with the USDA’s predictions, which have formed the basis of my recommendation of December corn futures in Futures Market Forecaster.

December Cotton

Cotton has long appeared undervalued to me from a fundamental perspective. It’s historically cheap, and the competition is a petroleum derivative. Cotton has grown in many of the same bone-dry areas where winter wheat is grown, and wheat prices have surged lately.

What I wanted to see was some technical indication this market bottomed; we received such a signal last week with the bullish island bottom formation on the daily chart.

Weekly Cocoa

Cocoa is produced in some of the more volatile regions of the world and a bullish head and shoulders bottom has recently formed on the daily chart. Cocoa is also sensitive to the value of the dollar and will tend to appreciate on dollar weakness.

The weekly chart above appears to be in a basing formation--the correction from the big 2001-02 rally is complete, opening the way for a new bull run.

August Cattle

South Korea recently opened up its market to US beef, and Japan is expected to follow shortly. The daily chart looks like it’s into a major bottoming formation.

George Kleinman is editor of Commodities Trends.

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