Commodities Boom Just Keeps Going and Going...

Jeff Cox, |Special to

What happened to the commodities bust?

Matt Rourke

After weeks of dire predictions that the boom in commodities prices was about to implode, gold, oil and grain prices are showing new signs of life.

Oil particularly has been exploring new highs each day. Gold and other precious metals cooled off in March but are now rallying and within range of the record highs set earlier this year. And grains -- especially corn -- are on another run that is being helped in part by a wet spring in the heartland growing areas.

It all adds up to a strong commodities run that analysts say is not a bubble but rather a move fortified not merely by speculators and inflation-hedgers but by some strong fundamentals.

"We will have zigs and zags and some of them could take your breath away," said Sean Brodrick, natural resource analyst for Weiss Research. "But, yes, I think we are looking at a sustainable summer rally that's already starting."

Just a few weeks ago, commodities players were anticipating that the stabilizing of the US dollar would cool off the hedging against the greenback's weakness and looming inflation, resulting in the end of the phenomenal run for commodities in 2008. Investors favor dollar-traded commodities when the US currency falls.

Continued demand for leading commodities, coupled with speculation among investors still wary of the stock market, will only push those goods higher. The only thing that could change it is the Federal Reserve changing courses and backing up the dollar, but that appears unlikely until the economy heats up.

Oil on a Slick Path Higher

OPEC's defense of higher prices and demand heading into the summer driving season make US light, sweet crude a strong play. Broderick points out further that gasoline prices, despite how much misery they've inflicted on American consumers, have risen at a much slower pace than crude.

As demand increases during the summer driving season, OPEC is likely to cut production or at least hold it level as a catalyst to raise prices to what some feel will approach $4 a gallon at the pump.

"This is a situation that if it continues for quite some time, we could see tighter and tighter gasoline, which will push gasoline prices higher and push oil prices higher," Broderick says. "OPEC is in no hurry to increase production."

Broderick puts the price of oil at up to $150 a barrel by year's end, though many analysts are a bit more conservative.

Oil investor T. Boone Pickens told reporters that oil is likely headed for $125 a barrel soon as he too points to a glut in production keeping prices high. Pickens this year got burned short-selling oil through his hedge fund BP Capital.

"The position is long, not short," Pickens told reporters, according to Reuters. "I covered the short position -- it was a mistake on my part."

Natural gas also is likely to hold its price. Anadarko Petroleum's Independence Trail Export Pipeline from the Gulf of Mexico is offline for repairs that could last four weeks, yet the company has promised to fulfill its contracts. The company will be forced to buy natural gas from the futures market to meet that goal, which will be supportive of the price.

Good as Gold and Grains

Gold surged past $1,000 just several weeks ago before backing well off to near $900. But with the dollar hitting 40-year lows and production limited against swelling demand, gold once again is hot. Gold gave back some gains Thursday after a three-day winning streak.

A report the World Gold Council released Thursday said gold would not be hurt if the US economy heads into recession and also is attractive as an investment because its price does not correlate to gross domestic product growth.

Appeal for the metal has increased since the credit crunch hit in September 2007, while investors also like it as a dollar and inflation hedge perhaps more than any other commodity because it is a dependable hard asset.

"For the foreseeable future I would expect all of those influences to remain with us to keep investment demand strong," said Natalie Dempster of the gold council.

Dempster said gold production is subject to regulatory limits so it doesn't react to normal supply-demand factors. It's become an attractive tool for institutional investors as well, who increasingly have been picking one of the gold exchange-traded funds that mimic the metal's movement for retirement portfolios.

"Even when the gold price has suffered its corrections on the way down, the gold ETFs have remained pretty constant," Dempster said. "There are a lot of institutional buyers in there as well. A lot of pension funds recently have been taking positions in commodities, and gold is included in all of the commodity baskets."

One of the more popular ETFs is streeTRACKS Gold Shares, which is up more than 10 percent in 2008. Other ETF plays for commodities include the iShares Comex Gold Trust, also up more than 10 percent this year, and the PowerShares DB Commodities Index Tracking Fund, which tracks commodities on a broader basis -- its components include crude and heating oil as well as aluminum, gold, corn and wheat -- and is up 17 percent.

Don't Go Against the Grains

Corn prices have been a poster child both for rising commodity prices and world hunger. Corn-based ethanol is being blamed for breathtaking inflation and food crises across the globe, but that's only part of the picture -- surging demand for emerging markets and skyrocketing fuel costs do more than their part to complete the picture.

Still, corn continues to rise and analysts are betting that a poor start to planting season will keep the crop's price high for months to come. Just two years ago, corn was trading at about $2.20 a bushel, but July corn was going for $6.14 Thursday, off record highs but still an astounding gain.

Wheat and rice, also in high demand, continue to post strong prices, as do soybeans, where prices are supposed to remain solid even though farmers may be tempted to switch from corn to beans in the slow start to planting season.

"The commodities as a whole just don't look like they've reached that point where they're turning around and going lower," said Darrin Newsom, grains analyst at DTN consultants in Omaha, Neb.

Newsom especially sees fundamentals backing up agricultural commodities, which have been boosted due to demand from China and other international markets.