Commodities euphoria about to turn to bummer?

Investors are shorting commodities, a sign that the sector's rally may soon be over. Just yesterday, a trader bought almost $1 million worth of put options to sell iShares Silver Trust by July, according to Bloomberg. Commodities — most notably silver and gold — have seen a run-up in the past few months. Although gold was at $1,439.00 per ounce last month, after a bit of a sell-off, silver has surged so far 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. Corn is trading at $7.75 a bushel, more than twice where it was a year ago. But David Kelly, chief market strategist at J.P. Morgan Asset Management, thinks that run is due to 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 today 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 increased prices' causing increased supply is generally true of all agricultural commodities, he said. For example, when oil prices surge, people tend to substitute it with 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 with Mr. Kelly. “It makes me uncomfortable to buy things at their peak,” she 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. “And I wouldn't say that was a trade for a four-year time horizon,” he said during the interview. “I would not want to be on the wrong side of a real shift in the commodity market. So that is the trade I would put on today, this year,” Mr. Ferguson said.