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Are Commodities Nearing Bubble Territory?

Stocks in this article: GSG USO DBB

By Kevin Grewal, Contributing Analyst at www.smartstops.net

As risk appetite is slowly on the rise, the U.S. dollar remains weak, optimistic economic news floods the mediam and inflation fears hover over both Wall Street and Main Street. Commodity prices have soared to their highest levels for the year. Can they sustain these price levels or has a new bubble formed?

Commodities including soy beans, oil, copper and wheat have all hit highs over the past few months, with some making moves as high as 5% on a daily basis. The iShares S&P GSCI Commodity-Indexed Trust (GSG) has risen a whopping 41% from a February low of $22.09 to close at $31.25 on June 10.

Crude oil has soared nearly 70%, which is illustrated by the jump in the US Oil Fund (USO), which closed at $38.97 on June 10 from a February low of $22.86. Lastly, the increases in metals can be represented by the PowerShares DB Base Metals (DBB), which is up 44% from its February low of $10.95 to $15.78 on June 10.

Advocates of a commodity bubble claim that prices have soared due to the recent commodity buying spree that China has been on; China has been stockpiling a range of commodities from crude oil and copper to soy beans.

Unfortunately, this buying spree can't be sustained and will eventually taper off. On the other hand, if inflationary fears continue to linger, the U.S. dollar continues to remain weak and investors remain optimistic about a global economic recovery, commodities do have the potential to remain relatively strong.

Regardless of whether or not commodities are in a bubble, investing in the aforementioned equities involves risk and you need to protect yourself with an exit strategy. According to the latest data from SmartStops.net, here are the price levels where the uptrend of the previously mentioned indices would be over: GSG at $28.86; USO at $35.18; DBB at $14.29. These levels change daily and can be found free at www.SmartStops.net

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