By Michael Johnston, founder of ETF Database.
Investors have rejoiced in the rebound of the U.S. equity markets this year, but the real winners have been those who were bullish on commodities as the markets bottomed.
Hopes of a steady recovery, consistent downward pressure on the dollar, and even strikes at major South American mines have sent prices for metals used in industrial and manufacturing operations skyrocketing in recent months. Copper has been one of the bast performers: the iPath Dow Jones AIG Copper Total Return ETN (JJC) has gained more than 100% for the year.
But the significant rise in copper prices has been based largely on expectations for increases in demand that are yet to materialize. Global demand has remained weak, and warehouse inventories have been steadily rising as a result. Moreover, demand for new houses, a critical driver of copper demand due to the need for extensive wiring, is showing signs of sustained weakness.Opinions on where copper will go from here are mixed. Some industry experts believe prices will continue rising through 2011, while others think a downward correction could be just around the corner. Prices have doubled on strong demand from resource-hungry China, but still remain below year-ago levels on relatively weak domestic demand. "The demand for goods is still very soft; the United States economy is just barely recovering," Allen Sinai, president of Decision Economics, told the New York Times. "In a weak economy where consumer spending is weak, businesses have been slashing left and right. This surprisingly deflationary result reflects that."