I have just read a pretty stupid (there is no sugarcoating it) article in Barron's calling for at least a 30% drop in commodities and basically making the case that the end in nigh for the commodity bull market. Where do I begin with the stupidity? First, it is not exactly bold to call for a 30% drop (from the top mind you, not from current levels) when commodities already took it on the chin and are already down 10 to 20%. Second, they point out to the fact that commercials (the so-called smart money) are net short on a massive scale, forgetting the fact that they have been so for a year. Every time there is a sustained trend, commercials by definition will hold record counter-trend positions. That's what they do, they hedge their physical positions with opposite corresponding market positions. Obviously, when the trend finally exhausts itself and reverses, they will usually be at their biggest net-short position ever but that's just a consequence of the trend and not a contrarian call by the commercials. In other words this indicator (net-short commercials), like any other indicator, can stay overbought for a very long time. Next the article argues that, should the economy really crumble, the CPI will turn negative thus cratering the commodities. However, and this is where they try to have it both ways, should the economy hold up well, the whole rationale for moving money from stocks to commodities will disappear thus, again, killing the commodity rally.
The truth is that we are in the middle of a secular bull market in commodities and those things tend to last a very long time. Calling for an end to it, using specious and contradictory arguments, might make for good copy but is otherwise a costly waste of time.