Commodities' Giddy Rise Leaves Investors Wary

COMMODITIES have suddenly moved front and center in the financial markets, reflecting rising global economic activity in North America, South America, Western Europe, and parts of Asia.

The whirlwind rally in commodity prices has been so intense in recent days that the United States bond market hit the skids Monday. Investors cashed in bonds that day, worrying that higher commodity prices would result in higher inflation and thus lower values on fixed income holdings.

There was some relief Tuesday as heavy rains across Iowa and southern Minnesota eased fears of drought and pushed down grain futures prices. Bond and stock prices promptly reversed course and rose modestly.

The Commodity Research Bureau (CRB) Index, based on 21 separate commodities and widely viewed as an indicator of future inflation, rose to 238 points Monday - its highest level since October 1990 when it hit 242 points.

Some expect prices to rise even further from that level. ``I see the index doubling to about 400 within the next seven years,'' says David Rothberg, director of managed futures accounts at Friedberg Mercantile Group of Toronto.

Undergirding the long-term trend in higher commodity prices are two factors, he says: ``Commodity prices are now very cheap in relation to production costs,'' and the expanding global economy means rising demand for a broad range of commodities. Mr. Rothberg says sugar, cocoa, coffee, and possibly silver and gold look especially promising.

DURING the past few weeks, about 14 of the 21 commodities in the CRB index shot up, such as soybeans and corn. The farm commodities, in part, rose because of continuing dry weather in much of the US Midwest. Lack of rainfall could hold down farm production and push commodity prices higher.

``Many of the commodities that make up the [CRB index] have been in down cycles for many years,'' so some rises can be expected, says Bill O'Neill, senior futures strategist with investment house Merrill Lynch & Co. Still, he cautions that ``some speculative fervor'' is now at play in commodities markets, linked to concerns about higher inflation.

Mr. O'Neill notes that a commodities index maintained by investment house Goldman Sachs & Company is not yet showing the broad upward gains of the CRB index, which raises some questions about the significance of the CRB rally.

The CRB index has been on a roller coaster of its own in recent months, somewhat similar to the turbulence of stock market indexes this year. The CRB index hit a new high for the year March 25; but by April 20, it was at a new low for the year. Now it is again hitting new highs.

For all the Sturm und Drang about inflation, the index remains far off its all-time high of 272 in 1988.

O'Neill says the CRB index will likely post a ``gradual'' rise in commodity prices over the next few years, although the roller-coaster effect cannot be ruled out. Base metals, such as copper, aluminum, and zinc, will likely post steady gains this year, along with coffee, sugar, and cocoa, O'Neill says.

Vahid Fathi, who follows metals for investment house Kemper Securities Inc. of Chicago, says supply and demand should help propel gold and silver prices higher. Gold has been trading at about $386 an ounce; silver, at around $5.70 an ounce.

Mr. Fathi reckons, however, that rising industrial and cosmetics uses for gold could push it to $500 an ounce early in 1995. Silver, he argues, could reach $8 to $10 an ounce.

Also, over the past six months, prices - and demand - for steel has been on the ascendancy, according to investment house Prudential Securities Inc.

Prudential says the domestic steel industry will ship 91 million tons of steel this year and 94 million in 1995. The US industry shipped slightly more than 88 million last year. Prudential also expects steel prices to rise by at least 3.5 percent this year, following a 4 percent price increase in 1993.