What does all this mean for investing in commodities, and how does it dovetail with the things I was hearing today in the commodities fund manager's speed-dating bonanza? Well ...
- We may really only be part of the way through a longer bull market in commodity spot prices. Even with an economic slowdown, demand from China can continue to grow. New supply is extremely slow to come on-line. Dwight Anderson from Ospraie suggested today that while he sees a point towards the end of the decade when supply and demand growth cross again, he is net long currently.
- We may see a major correction in commodities if the Fed gets it together and quits cutting rates and inflating the money supply. That sort of reflation is obviously not working as a solution to the credit crisis anyway. The correction may not mean the end to the long-term bull market, though it may be serious, and many people speculating on negative interest rates may be taken out on stretchers.
- There are serious dislocations being created in the commodities markets. Someone clever will make money off of them. I think it is unlikely that it will be purely financial money -- that is, I think the arbitrage will have to be done by someone that can actually deal with the underlying physical commodities, and not just options and futures. These people will make a profit and expand the commodities markets infrastructure to counterbalance the flood of institutional and ETF money that will continue to come into futures.
- The academic results about total return futures indexes may still be valid over the long-term, though we may be at exactly the wrong moment to start investing money in these strategies from a market-timing point of view. The current situation of low inventories, contango, negative real rates, dollar weakness and large spot increase smells just like the 70's. Beware inflation.
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