Do You Agree the Commodities Bubble is Far from Over?

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When commodities like silver, copper and oil slipped last week after record surges, many investors panicked and thought the commodities bubble had finally popped.

The Standard & Poor's GSCI Index that follows 24 raw materials fell 11.4% in five days, the most since December 2008. Silver plunged 30% and oil traded down to $94.63 on Friday.

Investors who had piled money in precious metals and raw materials feared their safe haven investments had reached a bull-market peak. Some said the commodities bubble had burst and the great rally was over.

But other analysts said the drop was panic-driven profit-taking by investors responding to commodities price dips early in the week. Higher margin requirements for silvers futures trading, a rising U.S. dollar, and mixed economic data drove some investors out of the markets. The fearful quickly followed suit.

This week, the same commodities have rallied and many analysts have reiterated their bullish outlook on the sector because the fundamentals for a long-term commodities bull market still exist.

They say global demand for metals and raw materials will continue to rise, driven by emerging economies like China and India. Energy demand will also remain high as the world continues using four-times as much oil as it's discovering.

Dr. Kent Moors, Money Morning contributing writer and editor of The Oil & Energy Investor, said last week's oil price slide does not mean the market environment is any different than before.

"This is the really important point: market dynamics have not changed at all; neither has trajectory or forward trends," said Moors. "The price of crude oil will still be increasing. A $150-a-barrel price may be delayed for a bit because of the 'correction,' but nothing has changed."

JPMorgan Chase & Co. (NYSE: JPM) on Friday raised its oil price outlook for 2011 and 2012, and Goldman Sachs Group Inc. (NYSE: GS) said oil prices next year will match or surpass their recent highs.

And now that some of the "nervous money" is out of the markets, hedge funds and institutional traders with deep pockets will fuel a commodities price rally.

Many investors have written to Money Morning asking what they should do with this recent volatility.

"If you're already exposed to commodities, don't sweat it, just mind your trailing stops," said Money Morning Contributing Editor Peter Krauth. "If you're not yet invested, look for some further weakness and then take a position. The bull run is likely to last at least a decade still."

Despite some market bears that think speculators have pushed commodities prices so high they no longer accurately reflect supply and demand, many analysts tell investors to sit tight.

"Commodities prices will be back," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "In fact, 12 months to 24 months from now, gold, silver and other commodities will be trading at higher prices than they were just a few weeks ago – when they were trading at record levels."

This brings us to next week's Money Morning "Question of the Week": Do you agree with the bullish long-term commodities outlook? Did last week's slide prompt you to get out of the commodities markets, or do you see this price drop as a buying opportunity? What are your concerns, if any, over commodities maintaining their gains?

[Editor's Note: Is there a topic you want to see covered as a "Question of the Week" feature? Then let us know by e-mailing Money Morning at mailbag@moneymappress.com. Make sure to reference "Question of the Week suggestion" in the subject line.

We reserve the right to edit responses for length, grammar and clarity.

Thanks to everyone who took the time to participate - via e-mail or by posting their comments directly on the Money Morning Web site.]

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  1. Antony | May 12, 2011

    Global expansion of less than 2% will mean no fall in unemploymment because that 2% can be created by innovation and greater efficiency. Whilst "gloom" could persist with these low levels of growth it would remain growth which would translate into increased commodity demand.
    China has drastically altered the supply of REEs and are currently on a huge shopping spree for all mines and resources worldwide. They do not dare not have the materials for their intended growth.
    I am most bullish for copper and LNG (in the long term)

  2. jj | May 13, 2011

    The real question is what happens to the value of fiat currencies everywhere.If people lose confidence in them then there is no telling how high commodity prices can go,when valued in these fiat currencies.I see lots of Chinese buying gold to hedge against their fast falling fiat Yuan.

  3. Ricardo Heded | May 14, 2011

    Commodities bull market is far from over. The silver market was manipulated with hike margins, profit-taking and panic.

  4. Walter Weidner | May 17, 2011

    The up's and down's of the commodities e.g. Silver etc. is just manipulation by those who are capable of interfering.The poor souls who read the stock market in the local paper and than call their broker are the losers. The system is top oriented, the sheep are paying for it.

  5. Ken Peterson | May 18, 2011

    Japanese considering legislation to replace half of their nuke plants with solar power over the next many years. SILVER is primary to solar power panel farming. Prices will only continue up in the long term. Especially in that one can mint silver but you cannot print it.

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