Will commodities boom last
As oil and gold prices hit record highs, and grains stay up, speculators rush in.
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Gold is typically viewed as a haven of stability when inflation is eroding the purchasing power of paper currencies such as the dollar.Skip to next paragraph
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Some analysts say it is no coincidence that a surge in commodities began in earnest around the same time the Federal Reserve began cutting short-term interest rates last fall. That monetary easing has continued this year, with Fed officials signaling that further rate cuts are likely in a bid to stabilize the housing and credit markets.
"I'm still quite bullish" on gold, says Dennis Gartman, a commodity analyst who publishes the Gartman Letter in Suffolk, Va. But if the commodity rally may run for a good while, some of the money flows simply represent investors who hope to buy high and sell higher.
"The folks in the grain business are very upset about the fact that so much speculative cash is flooding into the grain market," Mr. Gartman says.
Commodity cycles historically can last a decade or more, so the current bull run could have staying power even though oil and gold have been rising for several years now.
Buoying demand, also, is a long-term shift among investors looking for the best way to diversify their portfolios.
Increasingly, "alternative" asset classes such as commodities are seen to play a vital role even for everyday investors. The idea is that during bad times for stocks and bonds, these alternatives provide a beneficial offset.
Commodities have traditionally been the province of arcane futures and options contracts. But now investors can easily buy in using mutual funds and exchange-traded funds. Large investors such as pension funds have popularized the concept. The question is whether the benefits of commodity investing will persist when so many are following that strategy.
Another wild card is whether the demand for commodities from emerging markets will continue in the face of a slowdown in key export markets – the US and Europe.
"I don't buy that," says Mr. Kasriel.
But some forecasters say commodities will remain strong. High oil prices, for example, may reflect a long-term outlook for tighter supplies. Rex Tillerson, who heads Exxon Mobil, said in a CNBC interview this week that speculation may be adding $10 to $20 per barrel of oil.
Rising prices for wholesale materials don't have to mean that consumer inflation goes up. Still, worry has grown that US inflation could rise beyond its recent annual rate of about 4 percent. David Ranson, an economist at H.C. Wainwright & Co. in Beverly, Mass., predicts a good next five years for oil, but that the stock market will do better still.