How to make money in commodities

I LOVE bubbles. They are great for the economy, as long as you know when to get out. You can almost say the world economy goes from bubble to bubble separated by periods of sanity.

Right now we are experiencing a bubble in certain raw materials. For this blog, I am concentrating on manganese and chrome ore. Both have experienced significant price increases since the beginning of the year though with a few hiccups. Now, everyone is jumping on the bandwagon and predicting that the commodity boom has been resurrected.

For metals people (does anyone really want to be identified as a metals person) the questions are how far will ore prices go and when will metal prices (manganese alloys follow? Wrong question. Right question: When should I get out?

Like all bubbles, it was founded in reality. At the beginning of the year, ore stocks, especially in China were falling and miners had cutback and were experiencing logistics problems. While China’s economy was still depressed, at just under 7% growth was robust when compared to the stagnant Western economies. As a result, consumption exceeded available supplies and that triggered higher prices.

While it wasn’t a linear increase, it still strong.

As prices increased, the bubble started to form. “If I don’t buy today, tomorrow will be more expensive,” thought the buyers. Sellers thought: “Why sell cheap when tomorrow I can get more.” Now, everyone is jumping on the bandwagon predicting that good times have returned.

Now for the dose of reality. Demand is stronger yes BUT Western growth is still anemic. China is reorienting its economy more into goods and services and away from heavy industry. But the real problem is under or used capacity. As soon as prices go up, suppliers who have suffered immediately decide to sell more to recoup their investment. As supplies increase, buyers start thinking: “Better to wait until tomorrow since prices will be cheaper,” while suppliers are thinking, “Better sell or hedge today and lock in current prices.”

Pop goes the bubble.

The real question is when is too much. No one wants to be the last to leave the party.

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