No longer quacking

There is a long way to go before a definitive answer can be provided on the fate of the 2006 commodities boom that purportedly turned into a bubble, then became re-animated like the main character in Christopher Moltisanti's new film "Cleaver" on The Sopranos.

Christopher: "Originally I thought a ballpeen hammer, but a cleaver's better."

The Bank of Australia reported earlier today that demand for natural resources may keep commodity prices elevated for "several decades."

China-led demand for metals, minerals and energy has stoked one of the largest and fastest increases in commodity prices of the past century, matched only by the 1930s and 1970s, the bank said.

The Reserve Bank's currency-adjusted index of commodity prices was at a record in March, and has risen 84 percent in the past four years, led by a 205 percent increase in base-metal prices.

Hmmm...

Coming up on the one-year anniversary of last year's commodities mania with prices that remain firm (or better) across the board, you don't hear too much talk about a commodities "bubble" this year. You are more likely to hear grudging acknowledgment that last year's prices were no fluke, as demonstrated by the Bank of Australia above.

Now is as good a time as any to begin checking in with last year's predictions by those thinking that metal prices in 2006 would go the way of Nasdaq share prices in 2000.

First up is Commodities Pass Duck Test for Bubble Diagnosis by Caroline Baum of Bloomberg from last May in which a very important question was asked but not answered.

Another sign of the degree to which commodities have separated themselves from reality is the disconnect between home building and copper. Housing data "used to move the price of copper,'' which makes sense since the homebuilding industry is the marginal buyer of copper, Shaoul says.

Year to date, the Standard & Poor's 500 Homebuilding Index, which includes large builders such as Pulte Home Inc. and D.R. Horton, is down 20 percent while copper prices are up 86 percent. Is China really buying all that copper?

The answer provided here in Dissecting the Duck Diagnosis, a rebuttal to Ms. Baum's column (long before the two of us exchanged emails earlier this year) was "Uh, Yeah".

A couple of charts were provided along with some smart alecky comments about the Bloomberg columnist not really being interested in anything other than a confirmation of what she already believed to be true.

In this quick look back today, only two charts are needed to draw at least a preliminary conclusion about where things are headed and who's responsible for driving prices (make that, who's not responsible for driving prices).

New home construction in the U.S. has continued its decent from the level of last spring showing only tentative signs of making a bottom.


But look what's happened to the price of copper in the new year.

Housing data in the U.S. "used to move the price of copper" we were all told last year, Caroline being only one of a chorus of columnists making this same claim. Today, this U.S.-centric view of world demand appears somehow flawed, as if there is a new "marginal buyer of copper", a point made here last year, but not a popular idea on Wall Street.


Well, somebody is using a lot of copper to build something - that's for sure - enough to push prices back up to near where they were a year ago.

Granted, today doesn't look like a particularly good day for the most widely used base metal - Dr. Copper as some refer to it - but it should be clear from the charts above that the rumors of the death of the commodity boom appear to be quite premature.

If only housing prices would rebound like this.