Three reasons commodities might collapse

Soybeans, wheat, corn against the US Dollar, 1M, ending July 27th, 2012

In March I wrote about commodities, suggesting they might be a nice trade if for no other reason than many hedge funds were now bullish on that sector. Over the past month commodities have sharply increased, particularly so many agricultural prices as illustrated in the chart above. Soybeans ($SOYB, blue), wheat ($WHEAT, red) and corn ($CORN, black) are up 10.56%, 18.76% and 24.95% respectively. During the same time energy prices have increased by 12.53% and the S&P GCSI Commodity Index has risen almost 11% during the same period of time. So as The Fed gears up for another round of Quantitative Easing, what could go wrong?

Three reasons why commodities might crash. First, a stronger dollar. Keep in mind that market convention is to price commodities in the US Dollar, and another spurt of dollar strength would hit commodities, perhaps hard. Second, lower demand for commodities, typical of which occurs in recessions. Keep in mind the nation many consider to be the single largest consumer of commodities, China, is sharply slowing while Europe is in throes of contraction, perhaps recession. Third and finally, lower levels of credit would sharply hit commodities and typically during recessions we see banks withdrawing credit, at least in the early part of the cycle. So there you have it – three reasons why the recent run up in commodities might end, and badly. Watch The Fed next week, they almost certainly are going to pull something.

Oh yeh I guess a fourth reason why commodities might collapse – the big hedge funds are active in the sector.

Comments are closed.