The Commodities Bubble

I’ve been watching commodities for awhile now. It’s hard not to when the price of gas ticks up daily and the government stimulus check I received covers 3 weeks of fill-ups in our household (the Wife commutes 110 miles roundtrip each day thanks to matching at a Residency Program that was the furthest away from home; I drive 20 miles or so). In January 2007 oil was at $50 barrel; in May 2007 it was at $60. Today, May 21, it traded at $134. So in a period of 1 year it the price of oil has more than doubled. In 16 months it has nearly tripled.

When prices rise quickly in a very short time you are in a bubble. It doesn’t matter whether you are talking about commodities, internet stocks, or tulips. When you have the feeling that you are on a rocket and the only way to go is up, then you are actually standing on the surface of a bubble. And bubbles always burst.

I learned this the hard way back in 1980 when I spent money I received from my dad’s insurance on gold and silver – at $750 and $40 an ounce respectively. In Sept. 2005 I predicted that the housing bubble would burst. Predicted is the wrong word. It’s like predicting that a ball hit by Barry Bonds will land on the ground; it always will but you may not know exactly where.

Similarly the price of oil and other commodities will fall but instead of where we have to ask when?

I’ve always wondered if my experience with precious metals gave me a shortseller’s instinct. Unfortunately I lack the shortseller’s nerve – necessary to fall asleep at night, and one needs both to do it well. I’ve also had moral prohibitions against gambling and profiting from another’s misfortune. However this morality issue evaporates when you consider that traders are profiting off those who can least afford $4-$9/gallon gasoline (the price of gas is higher outside of the USA). I want to shortsell oil desperately and get revenge on the oil investors so badly that it almost hurts.

Painful or not, rest assured the time for revenge will come. The bubble will burst. When I searched a few months ago on the term “commodities bubble” in Google, I came up with a few thousand hits. Tonight the term returned 54,000.

But when? When will it burst? Shortselling is almost an art, but I would expect that since gasoline prices historically peak soon after Memorial Day, by mid-summer supplies should begin to reflect decreased demand caused by an unsustainable price. I’d be a fool to set a date, but why not: It’s my blog. I’ll pick last week of July.

It will be interesting to see whether I’m right or wrong then. Since I can’t afford to set up a short selling account, this will be an academic exercise.

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  1. The Razor » Blog Archive » Oil Boom Turns to Bust:

    [...] May I wrote the following: In January 2007 oil was at $50 barrel; in May 2007 it was at $60. Today, May [...]

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