- The Washington Times - Thursday, October 19, 2006

Commodities had a miserable third quarter and many on Wall Street say they have further to fall. That theory was bolstered when oil prices recently sank to their lowest levels for the year.

If commodities prices do sink further, it will be bad news for emerging markets and the investors who have poured billions of dollars into them over the past three years.

Commodities prices tend to have a domino effect — lower oil prices often drag down gold prices, for instance. And lower commodities prices tend to push down stocks in emerging markets such as Russia and Brazil, which have a rich supply of oil and metals, respectively.

While many emerging markets continue to be on a roll, if the commodity bears are right, there may be plenty of pain to spread around.

While investors pulled $263 million out of gold and natural resources funds for the week that ended Oct. 4, they still have $26.9 billion in the funds.

Stephen S. Roach, Morgan Stanley’s chief economist, wrote that the tidal wave of money that has flowed in recently has transformed commodities markets from good economic indicators to an asset like any other — susceptible to hysteria and bubbles.

“Just as return-hungry investors chased these markets on the upside, they could well run like lemmings to get out on the downside,” Mr. Roach wrote.

Merrill Lynch & Co.’s chief investment strategist, Richard Bernstein, agreed, saying that cheap money and heavy borrowing inflated prices in commodities. Those prices are now 60 percent above what could be explained by fundamental supply and demand, he wrote earlier this month.

Other factors that pushed prices higher, such as the U.S. housing boom and the Chinese economy, could also drive prices lower.

The decline in home construction has already hit the lumber market, where prices recently dropped to five-year lows. Metals used in home building, such as copper, are also facing price pressure.

Mr. Roach argued that a downturn for U.S. consumers could slow business for Chinese producers.

Less use in the auto industry should affect steel, aluminum, glass and rubber demand, wrote Tobias Levkovich, Citigroup’s chief U.S. strategist.

If the strategists are right, investors who have seen impressive run-ups in markets such as South Africa, up more than 25 percent year to date, might consider taking some money off the table — and away from all the other dominoes.

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