Renewed Appetite for Risk Boosts Commodities

The new year has brought us compelling clues that investors are regaining some appetite for risk after months of socking away their money (what was left of it after the stock market took a nose dive) in safe-haven U.S. Treasuries or under their mattresses.

The recent sharp declines in U.S. Treasury bond and Treasury note futures prices from record-high levels experienced last autumn indicate that investors are now looking elsewhere. The past few months had seen U.S. Treasury yields drop to record lows, with the shorter-term U.S. T-bills yielding virtually nothing, as investors were not worried about a return on their money but just a return of their money.

Many commodity futures markets, including grains, livestock and international foods, have seen significant rallies recently, as large speculative "fund" traders are again seeking out higher returns. Many commodity futures markets had experienced steep price declines since last summer, with some losing 50% or more of their value since last summer's highs. Now, bargain-hunting buyers of commodities have emerged in these recently beaten-up markets.

One commodity-bullish notion espoused by many market watchers is that strong price inflation will re-emerge in 2009. The reason is that the big injections of liquidity into the world financial system by central banks the past several months will reignite inflationary pressures.

Indeed, central bankers and economists were so worried about their economies sinking into a Great Depression-like deflationary cycle that they were willing to risk an inflationary period by pumping vast amounts of money into the world financial system. This is a bullish portent for raw commodity markets in the coming year.

My bias is that there will be good buying opportunities in the commodity futures markets the first half of 2009. And my bias is also that the bullish commodity market train has not already left the station and that market bulls can still get aboard.

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Jim Wyckoff is a senior market analyst for TradingEducation.com a free educational Web site. In addition, Wyckoff writes a blog offering current market commentaries every morning on TraderBlogs.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Wyckoff appreciates your feedback; click here to send him an email.