Is the commodities bull market finally over?

Well, is it? Is the bull market in commodities, especially crude oil, gasoline, gold, and betting against the dollar finally over? Is $147.90 on July 11, 2008 the peak for September crude oil futures? Is $150 just one of those goals that seemed like a no-brainer only a week or two ago, never to really happen in the real world? Well, maybe it is the end, or maybe not. It really is hard to say. I would say there is at least a 1 in 3 chance that we are simply looking at a short-term trading move downwards, and then a good-size hurricane headed for the oil fields and some saber-rattling with Iran, coupled with a few dramatic short-covering rallies could well cause an upwards spike one more time or even a couple of times, at least before Congress gets into the act and effectively legislates bubble-style commodities "speculation" out of existence in advance of the November election when all politicians will seek to appear to be 100% pro-consumer.

Since people are now at least seriously contemplating the end of the big run-up on at least a short-term basis, that means that a lot of people are betting on a big move down, possibly down to $100 or further for crude oil. But, if too many people make that same bet, even a moderate level of negative news could cause a big short-covering rally which would attract the bulls who are still convinced that this "rally" has years to run.

My recent thinking had been that traders and speculators would at some point simultaneously push gold back over $1,000 to a new peak and oil above $150 at the same time. That almost happened. I strongly suspect that unrepentant speculators will take another shot in the near future. Even $175 oil and $1,200 gold are not out of the question.

Ultimately, the real question is where is the money flowing? Is money continuing to flow into commodities funds or is money now flowing out? Actually, even if and when money begins to flow out of commodities funds, traders and speculators may simply reallocate from long-only positions to range-trading with short positions as well. Ultimately, that shift would cause prices to moderate, but in the short-term it could cause volatile swings and some dramatic short-covering rallies as people struggle to tell the difference between trend moves and trading moves.

The true wildcard variable is the state of the economy. In the traditional asset allocation clock, commodities remain in vogue until the economy falls off a cliff into recession. Unfortunately, there is a lot of confusion and mixed data as to the true state of the economy. For some, we are already in a recession or at least the early stages of a deep recession. For others, the weakness will likely be shallow and the economy is likely to spring back to life by next Spring. There is truly no consensus view on the state of the economy. Personally, I believe we are only seeing a slowdown and will not experience a true recession before the economic pace picks up again in the near future. That view would suggest that the bulls could have a bit more to run.

I am not betting one way of the other, but I would not be surprised at all to see $175 oil and $1,100 gold, especially if the Feds declare Fannie Mae and Freddie Mac to be off-limits to short sellers. If Jimmy Rogers is forced to cash out of his stock short positions, where do you think he will "invest" the proceeds? Commodities as a trade, especially if they are depressed on a too-sharp, short-term dip, are a prime contender.

The real answer is that the commodities bubble will continue to be susceptible to spiking upwards until all of the major Wall Street firms make a "trading call" and tell people to start reallocating out of commodities. I am not a major institutional client of Wall Street, so they won't be informing me when they make such a call or whether they may have made such a call in recent weeks. Since such calls are frequently not immediately made public, the true peak could come weeks or a month or more after the calls.

-- Jack Krupansky