Reality vs.
Illusion
HUMAN EXPECTATIONS often So what do many commodity market watchers (and some
become reality.Butformany,theillu- investors)blamefortherecentfallinprices?Speculatorsofcourse–
sionof‘whatmightbe’soondescends atleastthosesensibleenoughtocloseouttheirlongpositions...pre-
into‘whatcouldhavebeen’.Insuch sumablytheverysamepeoplethatcausedthesocalled‘bubble’in
cases,peopleareveryquicktomake thefirstplace.
excusesfortheirfailures,oftenwitha
greatdealofzeal:Economistsblame
“Reality is merely an illusion,
stochastics; financiers blame central
although a very persistent one”
banks; environmentalists blame ‘big
oil’;theunemployedblamelowwages
AlbertEinstein
indevelopingcountries,andhusbands EvenAlanGreenspanhasenteredthedebate(again)bydifferen-
blame ‘shopping’. Donald Rumsfeld tiatingbetween“good”and“bad”speculation.TheformerFederal
blames“unknownunknowns”. ReserveChairmanrecentlytoldusthatspeculationwas“important-
Illusions come in many forms and lyresponsible”fortherapidmoveupinoilpricesinlate2007and
manyaresopersistantandintox- early2008.Buthesuggestedthiswas‘goodspeculation’
icatingastobealmostindis- ofthekindthatultimatelymoderatesachangein
tinguishablefromreali- prices,andnot‘badspeculation’ofthebubble-
ty.Sohascommodi- creatingkind.Butitwasalsoclassic‘stabilising
ty price formation speculation’. “It brought forward the price
been a fairytale, increasethatwouldhaveotherwisetaken
anillusion?Has placeoveramuchlongerperiodoftime,
it depended reducingdemandsoonerandultimately
foritssuccess cutting the top off the intermediate
on the will- peakprice”saidGreenspan.
ingnessofits UptotheendofJune,itseemednoth-
audience to ingcouldknockcommoditypricesoff
suspend dis- theirperch.Anever-endinglistof‘fun-
belief? damentals’ fuelled the bulls’ enthusi-
Is this why asm. Following the phenomenal price
many market rallyformanycommoditiesinthefirst
pundits/experts halfof2008,wehaveseenapriceroutin
are now calling somesectors–nodoubtcomingassome
the commodities relieftothosepoliticiansimpotentwhenit
bubble‘burst’? comestomanagingsupplyanddemandcon-
Thecommoditiesillu- ditions for essential natural resources. Having
sionisover,orso weare previouslyout-performedequityandbondindicesin
told.Themagichasgone.The termsofabsolutereturnssince2002,manycommodity
rabbitisoutofthehat,sotospeak.The priceshavefallenbacktoearth.
recent pull-back in commodity prices Everythingthatwentrightforcommoditiesinthefirsthalfof2008
hasexposedthe‘pricebubble’–the hasbeengoingwrongsince,orsowearetold.Withtheendofthe
illusionofone-waymarketsdominated latest bull-phase, the momentum has been broken and some
byspeculativegreed.Nonsense. investorsandspeculatorshavebeen‘spooked’.Asthereisnowalot
Traders traditionally get ahead of moremoneyinthecommoditiescomplex,whenamajorliquidation
themselves.Marketsovershootinboth phasetakeshold,itsconsequencesarelikelytobeextreme.Atthe
directions – that is their nature. sametime,inmanyofthesemarkets,itonlytakesafewlargeliqui-
Politicians, even the few that really dationstoreversesentiment–andprices–veryquickly.Thismuch
understandmarketeconomics,arealso wehaveseenrecentlyinoil,platinum,goldandothers.
bepronetothisperhapsmostfunda- AswesuggestedinthelasteditionofCommodities Now,“...whatis
mentalofallhumanfoibles. nowunfoldingisasenseof‘demanddestruction’...whichsuggests
6 SEPTEMBER 2008 COMMODITIES NOW
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