Tuesday, April 29, 2008

Has the commodity bubble burst?

Recently, broad based selling swept through the energy, grains, livestock and metals markets.... Has the commodity bubble burst, or is this just another short term correction in a continuing long term trend? The current situation is similar to what I described late last year when I wrote:
"The long term bull market in commodities remains intact, but the risk/reward at this point in time is not optimal. Risk, simply stated, is uncertainty. That uncertainty relative to the expected return over a period of time is what one must consider when judging whether a position is worth entering. When considering the level of risk/reward it it important to understand what I like to call the "temporal dimensionality" of a potential position or trade. In what dimension or time frame would the trade be considered feasible? ...The temporal dimensionality of a trade should be aligned to entry and exit. If you would of bought stocks in the Dow index right before the crash of 1987 you would of gotten badly hurt over the short run, but if you held over the very long term you would of been ok. I am certainly not suggesting that anyone buy at market tops, you should be shorting then.... But what I am suggesting is that the time frame of a trade needs to be aligned to strategy and tactics.

Is the current situation similar or is this just another short term correction. In general, it is a correction but the temporal dimensionality of this correction may go a bit further out than most people expect. Looking at the major indexes - the CRB, the GSCI, the Rogers International Commodity Index, etc... all look like they are topping out. So, in the short & intermediate term prices are due to fall as the risk/reward became too unfavorable, but I would not be willing to bet that prices will be lower 3 years from now....

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