Morning Note: Commodity Correction or Bubble Burst?

Catherine Holahan of CNBC's "Fast Money"
Tuesday, 4 Jan 2011 | 11:02 AM ET

Separating froth from fundamental demand was the goal of the Fast Money Traders Tuesday morning. Gold and silver futures were each down more than 2 percent, prompting debate over whether the commodities trade was due for a major correction.

Joe Terranova, Virtus’ Chief Market Strategist, maintained that the sell-off would be limited to the metals space. Agricultural commodities and energy were rising on fundamental demand from China and elsewhere, he said. “The froth is in the metals trade,” said Terranova.

Brian Kelly meanwhile was watching the rare metals trade. Rare-earth producer Molycorp was soaring for the second day in a row Tuesday after its CEO said that it would double production next year to meet demand, begging the question of whether the run-up was warranted.

Molycorp and Rare Earths have quadrupled in value in the last 52-weeks on news that China would cut export quotas for rare earths. China currently produces more than 96 percent of the global rare earth supply. Rare earths are used in batteries, magnets and clean technology components. The U.S. energy department has recommended that the government find more sources of rare earths outside of China.

“Molycorp is my single stock story today,” said Kelly, explaining what was on his radar.

Two weeks ago, Molycorp CEO Mark Smith said on the Fast Money that the price increases for rare earths were warranted and that thee was no rare earth bubble.

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