Sunday, March 13, 2005

Supercharged commodities speculation

A Reuters article entitled "Funds Get Physical in Commodities Boom" gives an excellent summary of the extent to which rising commodity prices are due to speculation by hedge funds, but now by more conservative pension, insurance, and endowment funds as well. And I would imagine the big banks are in on it as well. Some funds are even taking physical delivery of commodities and holding to sell at higher prices in the future. This is all consistent with what I have been saying all along about speculation rather than demand or shortages pushing prices higher, but the extent of speculation by the non-hedge funds is quite an eye-opener.

None of this changes my overall view, but I may have to extend my horizon for this commodities speculation "bubble". How far to extend it will depend on how long the non-hedge funds have been in the game and how many are still standing in line waiting to get in. For all I know, the game may already be over and all the big players are already in and now looking to attract a large amateur audience to whom they can dump their positions to get out. After all, if it was such a sure thing, why would they be willing to let any outsiders into the game? It certainly sounds like an end-game maneuver. That said, I'd venture that "the party" could run anywhere from another two to twenty months.

The people quoted in the article, and obviously willing to be publicly quoted, included the commodities business development manager at ABN-Amro, a managing director at Goldman Sachs, the head of Commodities Research at Deutsche Bank, someone at Barclays Capital, someone at SG Commodities, and principal of hedge fund Premia Capital Management.

The only voice of reason in the whole article was John Kemp of Sempra Metals Ltd. who noted that "These markets are too small and illiquid to handle the amount of money that the investment community is pouring in .... It could go on for another six months, but the longer it goes on the harder the crash."

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