I have recieved a number of calls from reporters asking about “speculators running up commodity prices.” The calls tell me the mini-boom is about over. The Commodity Index Traders long positions were reduced by 70% between February 2008 and February 2009. They have rebounded with commodity prices and currently stand at $116 billion. This is just 43% of their peak total in February 2008, and about 45% above their trough low set in February this year.
The rebound in commodity prices is not setting any records, and in fact remains well short of normal rebound targets such as a minimum Fibonacci .382 retracement of the year-long down move. And commodity index traders are not setting any record either. They are still the largest players on long side of commodity futures markets, but they have not seen the bottom of this bear market yet. I still expect that most of these “investors” will either swear off commodities by the time they hit bottom and/or be barred by Congress from investing in commodities. If the latter, commodity prices could collapse well below fundamental value levels.
In summary, there is scant evidence that a new commodity bull market is underway. Last year’s bull market has not been fully retraced yet, as every other commodity bull market has since 1983. If the dollar breaks down to new lows on the year and gold breaks out above $1000, we will take another look. But both are low probabilities.