A commodities crash – or at least a severe correction – may be coming in 2011.
In the last two years, the number one factor that drove commodities higher was government stimulus.
On the physical side, it was China’s massive stimulus that fueled overbuilding and drove demand for raw materials. However, starting in 2010 and continuing into 2011, China rolled out a series of monetary tightening measures that now may threaten to slow the building binge.
On the financial side, it was the Federal Reserve’s QE2.
Keep in mind that commodity prices faltered in the third quarter of 2010 and it was QE2 that gave the rally new life.
On June 30, 2011, however, QE2 is set to end. Federal Reserve Chairman Ben Bernanke, in his first ever post-FOMC press conference, indicated that there will probably be no QE3.
There is one more factor that may prove disastrous for the commodities market – the raising of the margin requirements for commodity futures. It has already crashed the silver market. As it extends to other markets, a similar reaction may play out.
The three factors mentioned above all are occurring or coming to force around the same time – the middle of 2011. In doing so, they may have created the perfect storm for the commodities market.
In the very long-term, however, bulls like to point out that the secular trend of industrialization and urbanization in emerging market economies will likely drive commodities higher.
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