A number of Wall Street firms say the commodities boom is over. Gold, for example, fell to a 13-week low last week. Crude oil dropped to its lowest point this year on Friday. Stephen Roach, chief global economist at Morgan Stanley, the world's biggest securities firm, has been quoted as saying, “The mega-run for commodities has run its course.” On the other hand, Jim Rogers, who has made a fortune in commodities, says the commodity bull market is a long-term phenomenon with another 10 years to run.

Who’s right?

Here are a few observations based on 25 years of trading commodities. 

Whether it’s a bull or a bear phase, it seems mainstream stockbrokers (like Morgan Stanley and Fidelity) never seem to like commodities. Maybe they don’t understand or maybe they think they’re too risky, but generally they steer their clients away from commodities and toward traditional stocks and bonds. But in many ways commodities are easier to analyze than the familiar debt and equity instruments. You can look at the supply/demand for copper and more easily understand the market than you would by looking at a copper stock. When analyzing the stock, you need to not only figure out the supply/demand of copper, but also the fundamentals of the particular company. Company fundamentals can be negative, even during a positive copper market.

And there have always been commodity bull markets and commodity bear markets for individual commodities. Corn’s biggest bull run ever took place not during recent years but in 1996. Soybeans had their biggest rally in 1973. It’s not always productive to lump all commodities together. Each should be analyzed individually.

Now back to the main question. The widely followed commodity indexes have dropped more than 10 percent from their peaks, leading Wall Street to assume the commodity boom is over. However, the commodity indexes are heavily weighted toward energy--crude oil in particular. Crude has tanked since July, falling from $80 per barrel to $63, a 20 percent drop. The summer driving season is over, there’s a near-term glut of crude, and people are trading off the news of the big find in the Gulf of Mexico. Because oil sold down, gold (due to the sense that inflation would weaken along with energy prices) slid from more than $700 per ounce to less than $600. And sugar--which many people now believe is a proxy for oil--collapsed more than 30 percent from 18 cents per pound to less than 12 cents.  The commodity bears say world eco nomies are contracting, which will lead to slackening commodity demand.

Here’s my take.

There will be booms and busts in individual commodities in the future, just like there have been during the past 100 years. Looking at commodities in a macro sense, the bears are missing one major point: This is a correction, a short-term downtrend within a long-term megatrend. The US and European economies may be contracting, but aren’t the global economies, led by China and India, still expanding?

Regarding oil, do you believe the crisis in the Middle East is over? Is the US going to become energy independent anytime soon? Expansion in China and India, where growth has averaged an unbelievable 9 percent during the past four years, has caused raw-material orders to surge. So what if growth falls to 7 percent? China and India aren’t going away, and they’re still growing. 

We’re not at the end of the commodity bull market. What’s happening now is merely a normal correction within a megatrend, which will lead to buying opportunities. And, in light of last month’s record-high US trade deficit and the growing budget deficit, inflation isn’t going away any time soon; in fact, it will heat up in the coming years. This is bullish for gold in the long term. It’s possible certain commodities will drop; as a wise old trader once said, “The markets will fluctuate.” However, there are some real opportunities setting up in certain sectors where the demand curve looks to surpass supply.

My top pick for an individual commodity bull market in 2007 is in the grains, particularly corn and wheat. Based on the 30-year chart below, corn and wheat both appear cheap. The bull market for corn will be based on increasing demand; for wheat, it’s about dwindling supplies.

30-Year Corn



Source: Commodity.com

Corn is virtually the same price it was 30 years ago. Ethanol production will use at least 600 million more bushels of corn next year than it did in 2006.

30-Year Wheat



Source: Commodity.com

The price of wheat currently isn’t much higher than the 30-year price average, despite the fact that world wheat supplies are just about the tightest they’ve been at any point during the last 30 years

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Futures and futures options can entail a high degree of risk and are not appropriate for all investors. Commodities Trends is strictly the opinion of its writer. Use it as a valuable tool, not the "Holy Grail." Any actions taken by readers are for their own account and risk. Information is obtained from sources believed reliable, but is in no way guaranteed. The author may have positions in the markets mentioned including at times positions contrary to the advice quoted herein. Opinions, market data and recommendations are subject to change at any time. Past Results Are Not Necessarily Indicative of Future Results.

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