All Signs Point to Another Bubble in Commodities

At Reval’s New York City thought leadership event in 2008, one of the conclusions of the session was to buy Gold, based on fears that the mighty greenback was not worth the paper it was rapidly being printed on.  Oil had just fallen from its $140 highs and China’s aggressive growth path was stopped in its tracks by the global financial crisis.

After having shrugged off a year of European credit crises, we start off 2011 with all of the talk on commodities.  Monday, Jan 3rd started out with Copper reaching a fresh all-time high, while oil surged to as much as $92.58 a barrel in intra-day trading—its highest point since October 2008, according to industry reports. In addition, forecasts call for Gold to rise 15% this year to be above $1,650 an ounce.  Silver surged 80% in 2010, while cotton and wheat both shot up over 90%.

The commodities mania is not being lost on fund managers who have had a lot of success selling commodities-related Exchange Traded Funds (ETFs).  The largest silver ETF, the $10.2 billion iShares Silver Trust, has seen a $1.1 billion net inflow for the first 11 months of 2010.  The more ETFs created and sold means more volatility in prices that may distort historic trends or traditional commodities-related supply and demand.

As history has shown, no one wants to stop a party too early, and most don’t know they are in a bubble until it bursts.  The challenge is for those corporations who need to hedge real commodities risk but are faced with the temptation to delay hedging for fear of hedging what could be near the top.  You might start by asking yourself: what will get me fired first—doing no hedge and watching commodities continue its unabated climb or following an agreed upon and communicated risk management policy that should be indifferent to the level of prices.  Actually the two are intertwined, as the only reason you should not be hedging commodities is that you either do not have commodities risk incorporated in your risk management policy or you do not know your real commodities exposure.  Doing neither may not be grounds for termination, but may be grounds for not doing a good job.

So whenever the commodities bubble does burst, and it will when we least want it to or expect it to, make sure you have a hedging plan in place and communicated and supported at the board level.