Commodity prices and related exchange traded funds (ETFs) have skyrocketed back to levels they enjoyed before the financial crisis. That’s got some people asking: are we in a bubble?
The near-term price direction for commodity shares and ETFs are being dictated by the dollar, which has many fearing that prices have entered a bubble. A bubble is a rapid surge in prices, followed by a steep drop-off, most recently witnessed in oil prices in 2008 and real estate for much of the aughts. (How bubbles form).
Andea Hotter for The Wall Street Journal reports that gains for commodity prices are good this year: copper prices have doubled; zinc is at 18-month highs; cocoa is at 30-year highs; oil is at one-year highs; and sugar is at 26-year highs.
Are commodities heading into a bubble?
- Some analysts worry that China has pumped so much money into its stimulus efforts that any stabilization could have an impact on commodity prices.
- Other analysts feel that until commodity fundamentals improve, the dollar will remain the driver of prices. If the Federal Reserve cuts back on liquidity, though, some expect a “brutal” impact on prices.
- Jason Busch at Spend Matters has some signs of a commodity bust to be on the lookout for.
How can you spare yourself the wrath of a bursting bubble? Employ a trend following strategy. By watching trends and using the 200-day moving average, you will take emotions that usually accompany bubbles out of the picture. More on trend following can be found in The ETF Trend Following Playbook.
For more stories about trend following, visit our trend following category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.