Are we headed for a crash in commodities like the one in 1987 in equities? I doubt it. But, I am concerned that the commodities bubble is getting well out of hand. Certainly, the rationale for commodities as an inflation hedge and in a world of scarce resources is well-founded. However, the rise of late is downright frightening.
George Soros agrees. He went before the U.S. senate and testified that he believes the commodities bubble has hallmarks of 1987 written all over it. Now, that’s frightening.
MarketWatch has an article prefaced with this summary:
The investment flood into commodity indexes bears eerie similarities to the craze for portfolio insurance that led to the stock-market crash of 1987, according to hedge-fund investor George Soros, who warned that the rush into oil has created a “bubble.”
Later the article spells it out. Financial institutions like mutual and hedge funds are going crazy:
Lured by cheaper prices in longer-dated futures contracts, financial institutions continued to pile into the asset class as that initial opportunity disappeared. That’s because commodities turned out to be more profitable than other assets — a “classic case of misconception that is liable to be self-reinforcing in both directions,” he commented.
–MarketWatch, 3 June 2008
Stay tuned. This is a story whose ending you will be interested in.