Saturday, May 03, 2008

Have commoditiy prices peaked?

I am not the only one wondering if commodities prices have peaked or getting close to doing so. Sure, oil and gasoline are hanging near their recent highs, but gold and the other precious metals are well off their peaks. Sure, the summer driving season is coming up, but last year the peak price for gasoline was reached before Memorial Day weekend and gasoline declined through the summer. With consumers "in retreat" due to the weak economy and high energy prices, there is no reason to believe that the recent run-up in oil and gasoline were not 100% speculative and just as likely to fizzle and then reverse as Memorial Day weekend approaches.

As far as people who still believe the myth that the price of gasoline is high due to imagined shortages or increased demand, the latest weekly inventories report from the Energy Information Administration tells us that the supply of gasoline is "in the upper half of the average range" for this time of year. In other words, no sign of a shortage. And the report tells us that demand is "up by 0.4 percent from the same period last year." In other words, demand is up even less than GDP. With growth in demand basically flat, there is esentially no valid argument for higher oil and gasoline prices. I do not blame high energy prices on the big oil companies or "price gouging." Rather, gasoline and other commodities pricess are sky-high almost exclsuively due to rampant speculation by financial institutions and hedge funds, with speculation by smaller players as well.

And this silly argument that a falling dollar is also a main force driving up commodities prices is the epitome of overreaching and rationalization by speculators. Sure, you expect to see some increase in import prices as the currency declines, but you do not normally expect to see commodities to rise by a lot more than the change in foreign exchange rates, especially since not all of our oil is imported. Speculators are using foreign exchange rates as a cover for their own abusive trading. Besides, foreign exchange rates are also being driven primarily by speculative activity. So it is the height of absurdity for speculators to justify price movement in one commodity by their own abusive trading in another market.

Besides, there is an expectation that the dollar may strengthen if the Federal Reserve holds interest rates steady and even raises them later in the year, while the European Central Bank may be forced to lower their rates due to economic weakness in Europe. This could be a double or even triple whammy for the speculators. in the coming months.

Still, speculative bubbles can continue much longer than sensible people might forecast. Nonetheless, there is some expectation that oil and gasoline may peak sometime in the coming few weeks, if they have not already peaked. Whether we will see one last hurrah rally remains an open question.

-- Jack Krupansky

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