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What Bubble? Commodities Rally Is Still Far From Over

While the massive stock market rally could falter at any time, a weak dollar and strong global demand could mean no end in sight for the rampant run-up in commodities prices.

Oil, gold and other metals have posted strong rallies as monetary policy has undermined the US dollar and made commodities cheap to buy.

While stocks, too, have benefited from the weak currency, many experts believe the market may take a break soon from its rise of more than 50 percent.

With bonds facing an uncertain future in the meantime, the commodities rally is likely to continue even though in normal times it might generate fears of a bubble.

"We don't think there's a bubble," says Andrew Neale, portfolio manager at Fogel Neale Partners in New York. "The asset values are inflated, but until there's some sign of the dollar strengthening, which we don't see right now ... we see continued strength in the commodities."

Investors have a buffet of offerings from which to choose.

Neale likes everything from platinum and palladium to natural resources and energy-exploration stocks. Gold continues to push to new highs as experts predict it could reach $1,200 and beyond.

Oil, meanwhile, looks like it could break out of its trading range and set up a variety of investment opportunities. Neale says crude could reach $90 a barrel, while others are looking for a move at least to $80 over the winter.

"We still think there's plenty of room for movement on the upside," Neale says.

While the dollar weakness—precipitated by near-zero interest rates at the Federal Reserve—gets much of the attribution for commodity strength, there are other factors in the equation.

Strong global demand, particularly for metals used in construction and manufacturing, also is pushing the trade and could provide underpinnings that will extend beyond once the Fed starts changing course and tightening the money supply.

"We've seen incredible returns in emerging markets in the last six months to a year," says Adam Gould, senior portfolio manager at Direxion Funds in Milwaukee. "If that continues that definitely spurs demand for commodities."

Direxion manages leveraged index funds on both the bear and bull sides of the market. Gould, though, thinks the bears are winning right now.

"People are buying commodities, anticipating higher demand moving forward," he says. "There have been huge returns in equity markets, and people are looking for other ways to get returns than just investing in stocks."

Noted investor Jim Rogers has been a strong bull on commodities and said in a recent interview with Reuters that agricultural goods and precious metals are among his top picks. He also predicted that if there's a bubble right now it's in Treasurys, not in stocks.

That assessment is shared by those who believe that government debt will catch up to the bond market and blow a hole through Treasury prices.

There's also some fear that the falling dollar is bound to cause problems for stocks, which have been rising primarily on the weak greenback and its resulting discounting of asset prices. Experts think the drop in value could go too far and hurt companies trying to generate top-line revenue gains.

"Eventually the falling dollar means the bond market has to fall," says Lee Markowitz, partner at Continental Capital Advisors in New York. "The US is borrowing so much money, we're going to have to compensate foreigners for taking the currency risk. Either way it poses a risk for equities."

In fact, Markowitz says the dollar could be in a bubble, despite how far it's fallen.

Should both the Treasury and stock markets weaken at the same time, that will mean only more momentum for commodities.

"There's no question there's a growing belief that the dollar's decline is blessed by Washington," says Peter Cardillo, chief economist at Avalon Partners in New York. "If we continue to have a gradual decline, that's probably not going to induce commodity prices to unreasonable levels."

How far the dollar could decline is hard to gauge, but the dollar index has fallen 5 percent since its most recent peak on Aug. 17. Analysts at BoA Merrill Lynch Global Research say there has been support at 76 on the index, which is just above the current level.

"Technically we'll see some sort of bounce," Cardillo says. "From time to time you'll see some statements out of Washington (about the dollar), European central banks will make a lot of noise, Asians will make a lot of noise. That sort of backs off the speculators for a while."