Commodity sell-off prompts consensus for bulls and bears


LONDON/MELBOURNE: Mayur Ajmani bought copper last month only to see US$11,000 of his investment vanish in an hour when the metal had its biggest decline May 15 since 2004.  

“The loss was about the same as my entire salary for the year,'' said the 27-year-old manager of a call centre in an interview from his New Delhi office. “I just can't understand this market now.''  

What looked like the surest of bets – buying any of the 19 commodities in the Reuters/Jefferies CRB Futures Price Index – only a month ago is now hazardous to even some of the market's steadfast investors after the index tumbled 6.4% last week, the biggest drop since 1980.  

“Be aware that in all bull markets, there will be big corrections,'' said Jim Rogers, who in 1999 predicted what has become the longest bull market for commodities in at least five decades. “And it may last a quarter to two years,'' he said in a telephone interview from his New York office.  

Copper, silver, gold, orange juice, heating oil, sugar and gasoline declined by more than 5% in the rout last week that left wheat and hog futures as the only gainers. At stake are US$30bil of commodity investments to be made this year, an increase of almost 40% from 2005, according to estimates by London-based bank Barclays Plc.  

Copper, which traded between US$1,301 a metric ton and US$3,257 a tonne between May 1986 and the end of 2004, has since soared to US$7,610 and peaked at US$8,800 on May 11.  

Graham Birch's Gold & General Fund at Merrill Lynch & Co is still up 18% this year. Wolfgang Mayr's VCH Expert Natural Resources Fund in Munich shows a 16% gain, in part because of a bet on titanium.  

Now the euphoria that made commodities unbeatable is giving way to anxiety. “Signs of psychological excess are building,'' said Stephen Roach, the chief economist at Morgan Stanley, in a memo to customers of the world's second-largest securities firm on the day of the market's mid-May debacle. The ``blow-out can only end badly.''  

Marc Faber, who told investors to bail out of US stocks a week before the 1987 so-called Black Monday crash, is telling clients that commodity prices may plunge as much as 30% in three to six months. Only four weeks ago, Faber, who has 10% of his personal assets in gold bullion, was telling the same customers that commodities were five years into a rally that may last three decades.  

“There's been a lot of talk of a bubble in commodities,'' said Scott Gardner, who helps manage US$7bil, including shares of mining companies Rio Tinto Plc, Xstrata Plc and Teck Cominco Ltd for Bank of NT Butterfield & Son in Bermuda. That the market is calling it a bubble indicates that it “under-appreciates the asset class.''  

Michael Coleman, who helps manage a US$185mil commodity hedge fund in Singapore, said it's too early to call the end of the commodity boom. “The bull market will be over when demand growth drops below 3% a year for raw materials and is flat for energy,'' Coleman said May 16. “I don't see that scenario this year.''  

Michael Metz, chief investment strategist for Oppenheimer & Co. Inc. in New York, is more circumspect. He's telling customers that “the hot commodities'' among the metals have already seen their highs. “Gold is the exception,'' said Metz, 70, who recommends soft commodities such as grains, where prices have yet to challenge their records.  

Central bankers also may attempt to slow the pace of economic growth, which would curb demand for commodities. The US Federal Reserve on May 10 raised its key interest rate a 16th time to 5% and suggested the credit tightening isn't over after almost two years of rising overnight lending rates between banks.  

European Central Bank policy makers also have signalled they will raise the benchmark interest rate as soon as next month to limit the effects of higher energy costs. – Bloomberg  

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