A Warning on Commodities

NYT:

The many reasons to buy commodities add up to a strong reason to resist the urge, in Mr. Arnott’s view. “Of course, the time to buy something is when it’s out of favor, not when it’s wildly popular,” he said. “Commodities broadly have soared so far, so fast, that it’s time to hold back.”
That popularity may be greater than even the very benign fundamental conditions warrant. Tim Guinness, manager of the Guinness Atkinson Global Energy fund, attributed nearly $40 of the recent $122-a-barrel price of Brent crude oil, the grade traded most on the open market, to “politics and sentiment and scaremongering,” and said that the fair value was around $85.
David W. Rolley, co-manager of the Loomis Sayles Global Markets fund, a world allocation portfolio that can invest in any broad asset class, including commodities, offered another reason for circumspection: The limited size of commodity markets makes them more susceptible to big swings than stocks or bonds.
“Commodity markets are relatively small,” he said. “They can’t accept trillions of dollars of investment capital. There’s an investment desire by people that doesn’t fit. It means every one of these trades is crowded. You can get 20 to 30 percent moves up or down.”
Although Mr. Rolley said he “wouldn’t use the word ‘bubble’ yet,” he warned that any development that brings the sustainability of the global economic recovery into question could make these trades uncrowded in a hurry. That would be “perceived as very bearish for commodities and commodity funds,” he said.
But if a market top is at hand for this cycle, it would belie what Mr. Rolley sees as a much longer trend toward higher commodity prices. “We have a lot of confidence that the growth rate in domestic demand in emerging markets is going to be stronger for a long time,” he said. Those markets, he added, “are pretty commodity-intensive."

Anytime "everybody" is sure the market is going to keep moving in one direction, it goes the other way.  Be careful with commodities.