Tuesday, June 2, 2009

The Rebirth of the Commodities Bubble

The next asset class bubble appears to have emerged already from the ashes of the credit crunch. It is commodities - again. Since the beginning of the year crude oil has risen by more than 50%, copper by 65%. The speculators are back armed with facts and figures abut increasing demand from China. This time, however, those with actual exposure to commodities risk are racing to hedge that exposure. According to Greenwich Associates, in 2007 only 45% of firms hedged the risk - and we know where that led. Now, said the consultancy, 55% are in there hedging. This is still a fairly low number in my opinion. Speculators will ride this latest bubble all the way to the top, while 45% of firms with commodities exposure will get their faces ripped off. An oil trader I know said: "There is no rhyme nor reason for oil prices to be going up. But it is the same scenario as last time (2007) and I am going to ride it all the way up. You don't stand in front of a moving freight train."
The new chairman of the CFTC, Gary Gensler, went in front of the Senate Subcommittee on Financial Services this morning promising to keep a weather eye on the speculators. But the regulator needs money and it needs experienced staff to do this. I recommend they give him the money, he is going to need it - soon.

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