MILLBURN, N.J. (Stockpickr) -- I have said for some time that the synchronous and meteoric rise in the price of commodities is unsustainable. These markets were not being driven by the interaction of supply-demand dynamics. Rather, we had a situation in which speculative fervor was juiced up by the excessive leverage available through commodity futures and to a lesser extent leveraged commodity exchange-traded funds.While in traditional economics, the market's equilibrium is set by buyers and sellers agreeing on a price and quantity, in commodity markets, the price of the commodity is mostly a function of the futures markets rather than the spot or cash markets. Furthermore, from where we sit in the U.S., commodities are priced in U.S. dollars, but in other nations, those commodities are priced in their local currency. While the prices of crude oil and gold were surging in U.S. dollar terms, they were relatively unchanged when priced in euros. In essence, the recent commodity speculation was a dual trade on the price of commodities in U.S. dollars and the exchange rate of U.S. dollars vs. euros. Add to the leverage in commodities the available leverage in the currency markets, and the product was a toxic combination of powerful unidirectional speculation. To me this was representative of the housing and mortgage market whereby the fiction of housing appraisals was masked by the unlimited amount of credit with little or no down. Related: 11 Stocks for Lower Commodity Prices History is always destined to repeat itself. Leverage cuts both ways. It is intoxicating on the way up and nauseating on the way down. Just ask the Hunt Brothers, who made and then lost fortunes several decades ago in the silver market. They were done in by leverage when forced to make margin calls. I saw the commodity collapse coming, choosing to exit my metals and oil-related holdings, with the exception of Schlumberger ( SLB - Get Report), which is a long-term investment and part of my Bar Mitzvah Portfolio. The commodity collapse was going to take part in three stages. The first stage is when stocks and commodities both begin to go down together. This is the opposite of what has occurred over the past few months, with both commodities and stocks rising in unison.
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