Commodities - Don't Shoot The Messenger

Every time I write something about commodities I get a thumbs up or a beating from regular investors. I don't publish the comments as some are just from commodity web sites hoping for a little action but I find them very interesting as an indicator. It is similar to the story of Joseph Kennedy and the shoeshine boy.

Joseph P. Kennedy was heavily invested in the booming stock market of the 1920s, until, legend has it, he went to Wall Street to visit his broker, JP Morgan, about a week before the great crash of 1929. On his way, he supposedly stopped to have his shoes shined. While doing so, he asked the shoeshine boy for the news on the street.

The boy, named Billy, suggested that he buy US Steels and RCA stocks because he had “heard they are hot.” Shoes sparkling, Kennedy then continued on to JP Morgan’s offices, where he liquidated all his holdings. Returning home, his wife asked him what he bought. “I sold everything,” he said. “When the shoeshine boy starts giving you tips, it is time to get out of the market.” The Kennedy dynasty was preserved from financial ruin, and Joe’s son, John, would go on to become U.S. president.

True or not, it is is a great story of contrarian investment philosophy that has helped people become rich and stay rich in the markets and maybe its time, with commodities where they are, to take note of the many small investment websites that are pounding on about commodities and look at this particular bubble as over inflated.

Now, before I get a flood of emails saying gold is good, oil is going to $200 and we are all going to starve from the high prices in food, I will say one thing.... I am not sure we have topped out just yet... but hear my arguments.

Having run a commodities business I am acutely aware of the arguments for the rise in commodity prices and have written many research papers that, with hindsight, could not have been more right, however, even when I was writing those research reports I didn't believe that higher commodity prices in general could live alongside high oil prices.

Which is why I think that there has to be a breaking point somewhere. I think we have struggled along with oil prices as they are, just as we put up with the mother in-law if she came to stay for a few months, sooner or later you would have to kick her out or move house... i.e do something about it.

Oil is taking money out of peoples pockets, therfore it is impacting dramatically on what they buy. Simple supply and demand will take care of the rest. Less money around, less to spend on food.... commodities reduce in price....

You can talk to me all you want about global populaion growth but there are not significantly more people in the world in the last 5 years to make food prices skyrocket.

Speculation is the one of the major things that has been blamed for the rise in prices.... I have to agree.

I know some of you will say that is poppy cock. Your argument is that the majority of speculation is in the futures market.. as this market is primarily a place where contracts are never delivered, how is it affecting the underlying price of commodities? Great argument.. don't know the answer.

But answer me this; $260bn, at best estimates, have been invested in commodity index funds, can you tell me that this has had no affect at all on the underlying price of commodities? I would love to hear some theories as to why not.

I am aware that no significant hoarding of commodities is being reported which would indicate that such commodities are not underlying speculation, but I just cannot see how speculation is not correlated, in some way, to the market price.

My conclusion is that supply and demand will take care of commodity prices in the short term. Increased food supplies as farms ramp up production and short term cut backs from consumers will give equilibrium to the market. As for oil, I believe that pressure will put on oil producers to bring the price down via increased production in the market, alternative fuels and lower consumer vehicles will also help the situation.

Whether this is all going to have an affect on the immediate prices in the market only time will tell, but something has to give for sure.

I am reminded of the guy I was in businesses with in the commodities market. He had been in the business for 40 years and used to say "The commodities market is a funny beast... but there is one thing you should know.. prices fall twice as quickly as they go up.

Sage words.