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Shaky Rallies Draw Out the Commodities Bears

With commodities enjoying a robust start to 2012, some traders are concerned that crude oil and other hard assets are ripe for a fall.

“There is $15 to $20 of a geopolitical-risk premium built into the price of oil,’’ says Spencer Patton of Steel Vine Investments.

He cites trading on March 1, which was marked by a $3 spike in crude prices on rumors of a Saudi pipeline explosion.

Shares of United States Oil Fund, an exchange traded fund tracking futures contracts of WTI crude, jumped by a similar amount, as most ETFs in this category are designed to closely track the price of the commodity or commodities they target.

Patton says conciliatory remarks out of Iran is all it would take to see prices drop $10 in a single trading session. He adds that a worldwide oil glut and a multi-decade low in U.S. travel demand don’t support prices at current levels. He pegs the fair value of WTI crude at $90 per barrel.

A rapid spike in oil prices above the 2008 high of $145 could also have long-term negative effects by destroying demand.

Meanwhile, receding fears of financial Armageddon in the Eurozone are taking the shine offgoldas a safe haven.

SPDR Gold Trust, the largest ETF tracking gold through ownership of bullion, traded below its 200-day moving average for the first time in nearly two years in late December, which technicians often view as the start of a downtrend.

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Since hitting an all-time high of $184 in early September when gold reached $1,900 an ounce, the gold trust has skittered down and sideways. Shares retreated to $156 in late September and hit a new low of $150 in late December.

Such action is a strongly bearish signal, says Adam Hewison of INO.com, a futures and foreign exchange data provider.

“It’s not a money making trade at these levels,” says Hewison, who sees gold dropping as low as $1,620 by the end of March. “When there’s no strong [buying] interest, the market falls on itself.”

Natural gas prices are also taking it on the chin.

Production advancements could provide the U.S. with a 100-plus-year supply of natural gas. Such abundance foretells a long-term trough for prices — good for consumers but depressing for potential investors.

“Natural gas has plummeted, [because] we don’t have infrastructure to quickly take advantage of this abundant natural resource,’’ says Chris Brown, manager of the Pax World Balanced Fund.

Shares of iPath Dow Jones UBS Natural Gas, an exchange traded note that is a proxy for natural gas futures, are down 45 percent over the last year, which could weigh on the performance of energy stocks likeEncanawith significant natural gas production.

Chesapeake Energy said in January that it plans to slash spending on gas drilling by more than $2 billion this year, and analysts expect more exploration and production companies to follow suit.

Too much of a good thing is also weighing on the value of many agricultural commodities.

Stockpiles of rice are nearing record levels due to a combination of record production by China, other Asian growers increasing inventories, and falling imports.

Rice futures have dropped more than 25 percent in the last six months on oversupply concerns. Wheat futures are also being weighed down for the same reason.

PowerShares DB Agriculture Fund, which owns stocks of companies engaged in farming and crop protection, is off 14 percent over the same period.

The situation is similar for coffee, which has been trending down close to $2 per pound.

With stockseclipsing levels last seen before the financial crisis and the momentum of ample liquidity on their side, Steel Vine’s Patton recommends dumping commodities lacking strong supply/demand fundamentals.

“You should short or sell weak areas ... in a strong [equity] market.”

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