Commodity Bubble?

written by Glenn Szlagowski - Financial Adviser May 25, 2011 

Last month I warned that some investors might be performance chasing hot Canadian mutual funds fueled by skyrocketing commodities prices like gold, silver, copper, nickel, etc.  I cautioned that we should be diversifying and looking at other investments that I felt were undervalued.  

Other than skyrocketing prices, here is another possible sign of an overheated commodities market. In this case, it is copper that is drawing a lot of attention. Specifically, Chinese property developers are getting around tighter bank lending standards by buying or borrowing copper to secure loans from banks. According to a Financial Times article, borrowing copper and converting it to cash via banks is proving to be easier and cheaper than conventional borrowing. Additionally, the article[1] states that there is evidence of massive hoarding and stockpiling of the metal in China. 

As in all hoarding schemes, they invariably are unwound - sometimes in dramatic fashion. For instance, silver dropped 25% in just a few days as investors (speculators?) quickly unwound long positions by selling. 

Even the lofty Canadian dollar has retreated closer to par with the U.S. dollar as commodity prices have blown off some steam. 

Commodities have had a great run for a long time. If you have equity mutual funds that contain a lot of commodity type of stocks, it may be time to rebalance your portfolio. Please see me about making these changes. If you wish to make an appointment for a portfolio review, send an email to gszlagowski@assante.com  or call me at (519) 744-3020. 

[1] Chinese 'copper financing' got even more popular this month - posted by lzabella Kaminska on Mar 29, 2011 (Financial Times)