An interesting article in the Telegraph newspaper, a venerable and widely respected broadsheet publication as the Brits call the very few newspapers still worth reading in the UK, covered commodities prices and examined the idea that they are a bubble ready to burst.
Geroge Soros giving evidence to the US Congress also affirmed that speculation was largely to blame for the scope and speed of commodity price rises. No one is disputing the affect a rapidly industrializing China, India, Russia and Brazil are having on demand for metals, fossil fuels and agricultural products but the fire has been fed by $260 billion invested in commodity index funds. Like the emerging market bubble which burst with the East Asian crisis of 1997-98, the dotcom boom of 2000, the property bubble in both residential and commercial real estate in 2001-2007, pretty much simultaneously with the bubble in risk and credit instruments which unraveled last year, commodities are simply the next home for the investment funds looking for a rising market.
Like it or not one can’t argue that the author has a point, all bubbles are driven by certain valid fundamentals, in the case of metals it has been rapidly rising demand and an inelastic and limited supply. The extent to which it has been overblown will only become clear as it unfolds. Some metals like nickel have come down by 50% from their peak last year. That may be the adjustment that is required for nickel. To what extent and when others will reach a true balance remains to be seen.