US recession: Commodities will struggle

Eben Esterhuizen, a financial news analyst and writer for The Panelist, asks the question of the month: is this the end of the commodity bull run?

Below are a few of his thoughts found in a commentary entitled, Why commodities are likely to struggle in 2008.

"Evidence suggests that speculators played a big role in the recent commodity bull run. It seems likely that elevated volatility will continue in 2008, increasing the likelihood of commodity speculators selling long positions to cover margin calls.

"Some commodity bulls argue it would only take another banking disaster to lead to more Fed rate cuts, triggering dollar weakness and a fresh round of buying in commodities."

But this argument

isn't convincing, because volatility will increase if we saw another banking disaster, which may increase the likelihood of commodity speculators selling long positions to cover margin calls.

Furthermore, if the next banking disaster occurred in Europe commodities will take a double punch as the dollar strengthens and volatility increases.

Major trade weighted dollar weakness could be behind investors, further limiting upside for commodity prices.

History suggests that commodity prices will move lower if the US enters a recession, and historical evidence also rejects the notion that emerging market growth will continue to support commodity prices during a US recession.

However, supply disruptions may provide some support to commodity prices."