Misunderstanding the commodities plunge

Last week we witnessed the biggest plunge in commodity prices since the post-Lehman era (2008). Every commodity fell an average of 10% during the weak: wheat, cotton, soybeans, iron, zinc, silver, gold... even the mighty oil took a step down (and that is big news!). Part of this plunge was quickly erased as a rebound started right on last friday, but the situation is quite stable at the time I am writing this.

People started to reason that the recession was back, that the industrial sector was not growing as expected, that we are not producing enough or consuming enough of what we produce, that a dry spell could risk wheat crops in some parts of the world... According to these same people sometime during last week we stopped eating too, because food commodities also fell. These people are very wrong, we never were recovering strong enough to justify the never-ending rise of the last months neither we have suddenly stopped recovering now to justify the plunge. What are the real conclusions we can take away from last week's events? 

I see clear proof that speculators rule the commodities market.

One could have indicators of this being true long before, but last week just made it crystal clear. As previously stated nothing happened, macro-economically speaking, to justify such a steep fall. What made the commodities fall was a combination of profit-taking from speculators, the usual panic when the selling starts creating a chain reaction and fear from exhausting the market with too high prices. A typical stock market reaction applied to commodities trading.

UBS Bloomberg Constant Maturity Commodity Index (CMCI) for last month

Prestigious economists like Nouriel Roubini and Paul Krugman have said no matter which way prices move in the short-term, we are still on a long-term rising trend for commodities. Demand forecasts tend to agree with this affirmation and economic outlook reports already discount the rising prices of raw materials in their predictions. But the problem is when a market is ruled by speculators supply and demand do not matter anymore. In this kind of situation, investors become so worried about prices that the slightest up or down movement can trigger massive changes. Get used to these kind of rough changes on the price of energy and commodities, with real estate exhausted all speculators seem to have flocked at commodities markets. This kind of situation is not good for something so basic like commodities and energy prices, recovery is on the spot...