Much of that momentum was due to buying by investors and other speculators convinced that China would continue to buy huge quantities of almost all commodities. Exchange-traded funds tied up much of the physical supplies of gold and other precious metals. Volatility forced futures exchanges to raise margin requirements on a number of commodities.
But with growing evidence of a hard landing in China, the scales are dropping from speculators' eyes and industrial commodity prices, including copper, are swooning. As in the past, almost overnight, tales of perpetual shortages in key industrial inputs are magically disappearing as unaccounted-for stockpiles materialize.
Talk about bubbles! If commodities haven't been in one, I don't know what a bubble looks like. And I've studied a lot of them over the years and concentrated on predicting their demises.
The dramatic slowdown in Chinese economic growth that I foresee (see my March 7 column, "Watch out for a hard landing in China") will probably prick the global commodity bubble. That will be bad news for developing-country commodity producers such as Brazil, which has thus far largely escaped recent global economic and financial woes but is a major exporter of iron ore and other commodities to China. Developed commodity exporters – namely Canada, New Zealand, and Australia – may also suffer, along with their currencies.
I've long believed that a hard landing in China would be anticipated by a collapse in copper and other industrial commodities prices that would spread to other commodities as well. Copper prices peaked in February, and Barrick Gold's agreement on April 25 to acquire copper producer Equinox Minerals to gain mineral resources outside its area of specialization is a classic sign of a peak. Another classic sign of a speculative price peak was the sudden appearance of copper inventories where none were thought to exist.
Sugar also topped out in February and cotton in March. Then on May 2, silver prices, which had skyrocketed earlier, started their collapse and the prices of virtually all other commodities followed – crude oil, cotton, copper, and grains.
There is so much leverage money floating around the world that regardless of how it is managed – by fundamental, momentum, or technical strategies – it tends to end up on the same side of the same trade at the same time. So, when one of these positions reverses, the effects spread elsewhere rapidly as speculators bail out of their positions in order to slash risk and preserve their capital. The prices of the wide variety of commodities continue to move in lock step.
Many commodity bulls see this as a shortlived midcourse price correction and have maintained their long positions in copper, crude oil, corn, and even plunging silver. But markets anticipate, so it looks to me that the recent declines in commodities are foreshadowing a hard landing in China, with the effects spreading globally.
A. Gary Shilling, president of a Springfield, N.J., investment firm, is author of a new book "The Age of Deleveraging."