A slowdown in global growth, reduced demand for oil and the strengthening of the dollar has turned out the lights on the commodity trade's party.
The only question is whether investors should bail now or hold on until the festivities get going again.
Many market pros think that while the commodities bust isn't over yet, the long-term outlook is still bullish. So investors might want to trim back on some of their holdings now but look for opportunities to get back in over the coming months.
The slowdown for commodities has been broad and deep: Oil has tumbled more than 25 percent from its July historic high, while gold is down about 20 percent over roughly the same period.
Strong harvest outlooks, meanwhile, have given crop prices a haircut as sentiment grows that the economic slowdown that has hampered the United States is now just beginning to get teeth around the world.
The latest sign of the bust came late Tuesday, when Ospraie—a big commodities fund—told investors it was closing down after incurring big losses.
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"The world really is going into quite a sharp cyclical slowdown here and I think it's going to run probably right the way through well into the fourth quarter," Giles Keating, head of global research at Credit Suisse, said on CNBC. "And that global slowdown is really dragging down commodity prices, including oil." Get the video ofKeating's analysis.
Prevailing sentiment has it that energy indeed will continue to lead the commodity downturn probably through the rest of the year, despite a contrarian view from Goldman Sachsthat oil will spike back up to $149 barrel by the end of year.
From there, commodities will be a cautious play, with investment advisors telling their clients to perform dollar-cost averaging—essentially buying as prices fall—to see what commodity weight their portfolios should carry.
"If you don't own commodities, it's time to dollar-cost into them," says Michael Kresh, president of M.D. Kresh Financial Services of Islandia, N.Y. "You should be looking at commodities, broadbasket commodities, as a long-term secular trend that cannot go away unless we're talking about a worldwide recession that lasts for years."
Watch video of commodities outlook at left.
Kresh is a bit more bullish on commodities for some, maintaining that economies in China and India will continue to grow, providing demand for metals used in infrastructure building as well as gasoline for transportation needs.
Burgeoning middle classes in both countries will cause demand that will outstrip production, he says, adding that those who do own commodities should make sure their portfolios are properly balanced so that they can take advantage of higher prices when they arrive.
But the mood among those backing out of commodities is that overall global demand will not be enough to sustain the astronomic prices earlier in the summer. Economies in the euro zone as well as much of Asia have been slowing considerably and are expected to be the biggest components in the global downturn.
Andrew Gordon, investment director at the Investor's Daily Edge newsletter, says commodities are in a "breather" likely to last into 2009.
"Commodities are going to take a hit, there's no doubt about it," Gordon says. "We're heading into the worst of the global slowdown and it's going to last for a while. These breathers can last up to a year. It can go well into 2009. I see the beginning of the second half of 2009 for this thing turning around."
Diane de Vries Ashley, managing partner of Zenith Capital Partners, says she's avoiding commodities altogether.
"One of the great characteristics of commodities is it's a pure trade," she says. "With a lot of very pure trades, if you're asking should there still be one, you probably have missed it."
Where's the Money Going?
In the meantime, Gordon advises investors to look for the areas that suffered the most during the commodity surge.
He cites airlines as one possible area of benefit, but particularly sees rail and trucking doing well as transportation costs fall.
Gordon likes Canadian Pacific as a company that can capitalize on the move lower, especially because it is moving into an ethanol-producing region of Wyoming.
And Paul Schatz, president of Heritage Capital, said on CNBC that he favors some real estate investment trusts and aspects of the bond market, at least in the short term. See Schatz' comments in video above.
Kresh has been putting his clients into the Pimco Commodity Real Return Fund, which invests in commodity-linked derivatives but with no more than 30 percent in energy.
"We may have a temporary slowdown, but the overall trend is clear," Kresh says. "It's not going away."