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Commodity bull over?

Is the commodity bull market over? Or will the recent drop in prices result in a months-long consolidation phase that sets up the next advance of a secular bull move?

It seems a lot of attention has been focused on the overheated metals sector and the recent drop in prices. The precious metals, gold and silver, have pulled back from their recent highs(from around $730 gold & $15 an ounce silver). Palladium has pulled back from its recent move up to $400 and even Platinum's recent strength has ebbed slightly.

The base metals seem to be the real focus of attention, as observers debate over the possibility of a "commodity bubble" in the wake of copper's recent surge. Now that some prices are starting to drop, a large number of commentators are coming out of the woodwork to proclaim the end of "the commodity bubble". Forgetting, for a moment, the fact that there are other commodities outside of the precious metals and base metals sectors, and that some of the agricultural commodities have yet to enjoy their day in the sun, let's take a look at some of the reasons why commodities might be vulnerable here.

Of course, the first thing that comes to mind is the idea that commodity prices ran up largely on the story of increased Asian demand (you could certainly include energy in this discussion). So let's look at this aspect of the commodity boom. A recent piece on the commodities correction at cites recent comments from Morgan Stanley analyst Stephen Roach regarding the fuel provided to the commodity boom from the "China juggernaut story". Roach seems to be saying that the commodity boom is just the latest of recent bubbles in the world economy, that at some point the bubble will burst, and that even the China story has its limits. An excerpt:

The key here is to realize that China is not going to keep increasing the commodity-intensity of its GDP growth. In fact, in the just-enacted 11th Five-Year Plan, the Chinese leadership announced explicit targets to reduce its energy content per unit of GDP by 20% over the next five years. China’s concerns go well beyond oil. Potential bottlenecks of industrial materials, together with sharp increases in input prices such bottlenecks trigger, are viewed as a serious threat to sustainable economic growth.

It is not that difficult for China -- or any country in the developing world -- to improve the commodity efficiency of its economic growth China has lagged in deploying oil and other commodity-conserving production technologies. The Chinese do not have to develop new technologies to enhance commodity efficiency -- they merely need to copy those already in existence elsewhere in the world.

Recently, Paul van Eeden was interviewed at and was asked if he shared similar views to those expressed by Mr. Roach. Paul, who is now stating that the commodity bull market is over, seemed to agree in one sense when he said, "you cannot just look at Chinese consumption of metals and draw conclusions about commodity markets, but that is what the market did - and it was wrong." The full interview can be heard at Howestreet's interview page.

Just above the Paul van Eeden May 26 interview link, you will find a May 27 interview with Jim Rogers. I find it interesting to see the two interviews juxtaposed, as Rogers is probably the most visible and publicly recognized commodities bull. Since the turn of the millennium, he has been one the earliest and most outspoken proponents of the view that the current price cycle is part of a longer term, secular bull market for tangible assets. I'd have to guess that, given Jim's prior statements, he would interpret a commodity market drop as a correction within that larger cycle. In fact, I have heard him suggest repeatedly that any fallout over an economic slowdown in China could prove to be a buying opportunity for commodities.

I would love to hear a debate between Rogers and van Eeden on this topic. I'm sure it would prove fascinating and I think both would press and challenge one another with their differing viewpoints and arguments. For now, I will listen and sift through their reasoning and try to make sense of it all. For anyone interested in the commodity market, I suggest you try and do the same by learning from the knowledgeable participants such as van Eeden and Rogers who have attempted to study this market seriously and have their own money invested in it.

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