The commodity market bubble could burst at some stage and prices will tumble if the dollar stabilizes and China's banking system hits trouble, a fund manager told a conference on Wednesday.
Michael Howell, managing director at UK-based Crossborder Capital, said a large part of commodity price gains in recent years were due to the generally weaker dollar rather than strong economic growth as is generally advertised.
A weaker U.S. currency makes dollar-denominated commodities cheaper and more attractive to investors holding other currencies.
We are in a real asset bubble and at some stage that bubble will burst, prices may come down rather significantly ... The argument for a supercycle is not that strong, he said at a conference organized by Worldwide Business Research.
Howell likened the recent commodity bull run to Japanese stocks in the 1990s and more recently the dotcom bubble in 2000.
If you look at commodity price gains over the long term, what you see is that the biggest gains occur when the dollar is weak ... One of the things people will throw back at me is the China effect.
The dollar recently hit a record low of $1.3682 against the euro, while on Wednesday it was trading around $1.3440.
China is growing very fast, at around 10 percent a year, but Chinese companies earn minimal returns on capital.
Let's not delude ourselves, it's communist-led capitalism ... The Chinese banking system is becoming insolvent and there may be a significant crash coming up, Howell said, adding that China's dash for growth was about creating jobs.
If that's the case we may get a significant fall in the credit cycle on top of a significant fall in the real economy.
Howell said the correlation between commodity prices and the real economy was quite small.
During periods of currency stability, commodity price performance is actually very poor, he said.
If you see problems in China, the gold price will go up.
Investors often use gold as a hedge against inflation and economic and political uncertainty.