Commodities Boom Over? Not So Fast, Experts Say

Rumors of the commodity boom's demise may have been a tad exaggerated.

With the resurgence of the stock market and sudden strength of the dollar, many investors are sensing that the meteoric rise of energy, agricultural and mineral commodities prices is nearing an end.

Winfried Rothermel / AP Wheat Fields

Not so, say commodities experts. Despite the recent pullback, long-range global demand and strong fundamentals are expected to keep commodity prices aloft.

True to form, many commodities, including oil and gold, posted solid gains Friday after being battered for most of the week.

"We are seeing some pullback," says Weiss Research commodities analyst Sean Broderick. "But nothing goes up in a straight line. The long-term fundamentals of the dollar are still pretty bearish. I expect a short but sharp rally in the US dollar. I expect it to run out of steam and then I expect the commodities trade to continue."

Though most agree there is a pullback, expectations differ on how long it will last. A weak US currency helps dollar-denominated commodities, though growing international demand also is boosting prices. So with the dollar seemingly headed toward a period of strength, a lot will demand on how much demand there is for a particular commodity.

On Friday, for instance, oil prices rose despite a stronger dollar. The reason: positive US economic reports fueled speculation that demand will remain strong.

Analysts believe grains like corn and soybeans will trend higher while wheat is likely to slip. Silver and copper are seen as solid plays among the metals, while gold is likely to trade in a range. And oil is expected to slip some before renewing gains later in the year.

Broderick thinks continued economic weakness will push the dollar back down, making the commodity pullback brief. Jeffrey Christian, an analyst at CPM Group, sees the pullback lasting through the second and third quarters. Quincy Krosby, chief investment strategist at The Hartford, believes the decline will last as long as the dollar rebound, which was sparked this week by expectations the Federal Reserve has stopped cutting interest rates.

"We really don't know," admits Darrin Newsom, grains analyst at DTN. "The larger picture of the dollar index looks like it's stabilizing. This is starting to draw some of the money back. Is it all going to rush out of commodities at one time? I don't think so. But I think it's already beginning to draw out of commodities."

Global demand from developing nations will at the very least keep a floor beneath most commodities. Governments in Middle Eastern countries are building entire cities. China wants to become a world player in terms of commerce as well. Brazil and India are continuing their movement toward economies that embrace free-market principles more broadly and are demanding oil, wheat, copper and other supplies to forge ahead.

All of which makes for a healthy commodities market, if not for the short term than at least over the long haul.

Broderick sees oil prices hitting $157 a barrel but likes natural gas even more and plans to buy should there be a sustained pullback.

Broderick also sees copper as a strong play with its demand from manufacturing, while also liking silver for a second-quarter rally.

"If we've seen the bottom in the US economy that means that our demand for overseas goods will ramp up again, which means their economies which are already in overdrive will only accelerate," he says. "That means global demand in commodities will keep accelerating."

Retail investors looking to play metals and other commodities can reduce risk from the futures markets and play them through ETFs like the iShares Dow Jones US Basic Materials , the PowerShares Base Metals and the streetTRACKS Gold Shares funds.

Corn as a Wild Card?

Krosby is less bullish on commodities, contending that investors must still keep them in their portfolios but recommending that they limit their exposure going forward. Emerging markets are a "crucial" element of the trade right now, she says.

"We would be trimming our positions but we would still have exposure to commodities," Krosby says. "If, however, you start to see data points suggesting that growth in emerging markets is coming down substantially you're going to see even more of a selloff--but we're not expecting that. We do see signs of a slowdown in emerging markets, but certainly not one that would suggest a recession-like environment."

Demand for ethanol will see corn's prices stay high, she says, while Newsom also identifies soybeans as a strong crop due to foreign demand. Corn is particularly tricky as it had a late start to a growing season that is supposed to be wetter than usual this year. That could act as a severely bullish factor for prices that have nearly tripled in the past two years and risen 18 percent in 2008 alone to more than $6 a bushel.

"If there's a market that could still act as a wildcard it is the corn market," Newsom says. "Not only are we going to have fewer acres ... but the weather has been less than cooperative. ... The market remains a bit on edge. While we had been predicting ($6.50) for quite some time, there's a lot of talk about blowing through that top."

The major agriculture ETFs include PowerShares DB Agriculture and the iPath Dow Jones AIG-Grains .

CPM's Christian says some of the pullback in commodities will come from what he calls "weak hands"--some would simply call them speculators, a term Christian avoids--who don't have deep commitments to commodity investing and will pull out at any significant sign of weakness.

Otherwise, expect the popularity of the trade to continue.

"People will refocus and say maybe we were overblown in our views about the world economy, the US economy, the US stock market, the US dollar," says Christian, who cautions, "I think there's a lot of hot money in these markets that can disappear quickly."

Yet Krosby says the underlying international demand makes commodities a must.

"You will see slowdowns, where all of a sudden contracts are broken. Overall, they're continuing apace," she says. "Even if we see a slowdown, there will be a pickup after."

© 2008 CNBC.com