Shorting surge points to end of commodities boom

Investors are shorting commodities, a sign that the sector's rally may soon be over.
APR 21, 2011
Investors are shorting commodities, a sign that the sector's rally may soon be over. Just last week, a trader bought almost $1 million worth of put options to sell iShares Silver Trust by July, according to Bloomberg. The Goldman Sachs Group Inc. said last week the risks of investing in commodities outweigh potential gains, dropping its recommendation to buy a basket of raw materials. Commodities — most notably silver and gold — have seen a run-up in the past few months. Silver, especially, has surged and is up about 30% this year. The front-month silver contract climbed 3.4%, to $41.975 an ounce, the highest level since January 1980. Food and agricultural prices have also risen. But David Kelly, chief market strategist at J.P. Morgan Asset Management, thinks the run will end soon. “If you have high corn prices now, there isn't much more that the farmers can do this year other than just smile and make money,” he said last Tuesday during a webcast at which he discussed the firm's quarterly economic and market outlook. “But next year, they will plant more.” This trend of in-creased prices' causing increased supply is generally true of all agricultural commodities, he said. For example, when oil prices surge, people tend to substitute natural gas and coal. Consumers also tend to conserve more as energy prices go up. “When I see commodities prices go up this much higher, it's traditionally been a harbinger of lower prices ahead,” Mr. Kelly said. Gold and silver can serve as a good hedge against inflation, but investors should be careful, Anne Lester, senior portfolio manager for J.P. Morgan's global multiasset group, said during the webcast. “It makes me uncomfortable to buy things at their peak,” Ms. Lester said. In an interview on PBS' WealthTrack last month, Harvard University historian Niall Ferguson talked about how he recently attended a conference of mining companies and the mood was “like the dot-com boom of the late "90s. It was really euphoric.” Mr. Ferguson said that he, too, is short on commodities. E-mail Jessica Toonkel at [email protected].

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