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The commodities bubble is about to burst

With more evidence that China's economy might face a hard landing, much of the momentum for commodities is starting to subside

Gold items, including gold chains, rings, bracelets, and dental fillings, are shown before being melted at the Pawn Advantage store in Santa Rosa, Calif., on Oct. 4, 2010. Gold and other precious metals were on a tear months ago, but now, the commodities bubble is getting ready to burst.

Newscom / Santa Rosa California News / File

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If you are thinking of investing in commodities, consider the plight of Wile E. Coyote in the "Road Runner" cartoons. He has plenty of momentum until he runs off a cliff. Hanging in midair, he realizes his predicament, then drops like a rock to the valley floor far below.

Now, look at commodities. Months ago, industrial metals were on a tear. So were precious metals and crude oil. Silver, with a foot in the industrial camp and the other in the precious metals group, skyrocketed.

Much of that momentum was due to buying by investors and other speculators convinced that China would continue to buy huge quantities of almost all commodities. Exchange-traded funds tied up much of the physical supplies of gold and other precious metals. Volatility forced futures exchanges to raise margin requirements on a number of commodities.

But with growing evidence of a hard landing in China, the scales are dropping from speculators' eyes and industrial commodity prices, including copper, are swooning. As in the past, almost overnight, tales of perpetual shortages in key industrial inputs are magically disappearing as unaccounted-for stockpiles materialize.

Talk about bubbles! If commodities haven't been in one, I don't know what a bubble looks like. And I've studied a lot of them over the years and concentrated on predicting their demises.

The dramatic slowdown in Chinese economic growth that I foresee (see my March 7 column, "Watch out for a hard landing in China") will probably prick the global commodity bubble. That will be bad news for developing-country commodity producers such as Brazil, which has thus far largely escaped recent global economic and financial woes but is a major exporter of iron ore and other commodities to China. Developed commodity exporters – namely Canada, New Zealand, and Australia – may also suffer, along with their currencies.


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