Saturday, April 30, 2011

Commodities About to Crash? But Why?

Everything is booming!

Investors need not look far these days to know that commodities have been doing extremely well. Thanks to late night infomercials, "We Buy Gold" kiosks springing up in shopping malls and gold parties becoming the pampered chef of the new decade, the commodity boom is obvious to even the most casual of investors.

  • Gold is booming.
  • Silver is booming.
  • Copper is booming.
  • Oil is booming.
  • Cotton is near historic highs.

But according to this MarketWatch article (humorously subtitled: Everyone hearts commodities), the party is about to end.

Meet the man.

Jeremy Grantham is the chairman of Boston fund firm GMO, and he sees this boom-time quickly coming to an end.

He's gained credibility calling such things in the past: he warned about the 2000 bear market as well as the 2008 crash.

Interestingly, while Grantham is warning that commodities are about to crash, he is a huge bull on commodities long term - He thinks we're running out of everything.

But why?

Grantham's reasons for the impending plunge are simply:

  1. Agricultural commodities are set up for a fall.
  2. China is about to go bust.

Regarding agriculture, he believes we've just come through the worst year for farmers in generations. He points out that this year is likely to be a bumper crop year as farmers seek to regain some of what was lost last year, resulting in an oversupply relative to last year and thus sending prices downward.

"Agricultural commodities ", he says, "are quicker to respond to prices than almost any other. Farmers just plant more crops."

As for China, Grantham says he sees China expanding too fast to be sustainable. He sees too much infrastructure and too much debt, and when China cools (or crashes) it will take commodity prices with it.

What he doesn't mention.

What he says makes a lot of sense to me, but there are a few other driving factors he just doesn't mention.

For one, there's the push to use corn crops for ethanol. That's playing a sizable part in drive up food costs, but probably not enough to warrant the current prices. Besides, I think he's probably focusing on other agriculture commodities like coffee, which has seen a meteoric rise of late, due to weather impacting crops.

Another unmentioned driver is the U.S. Government's reckless spending binge.

Fear of the collapsing dollar and its eventual end as the reserve currency, and fear of what that would mean for paying back the 14 Trillion in debt have driven the price of gold and silver through the proverbial roof. With the recent warning of a down grade by the S&P, I don't see this fear abating any time soon. Do you?


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