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Think commodities have peaked? Don't count on it

tractor-corn-fields 2006 Hemera Technologies

Have commodities decoupled from the economy and the stock market?

At first blush, the question sounds nuts. It was only a month ago that the entire commodity complex was presumed to be a bubble in the process of bursting.

And no one will soon forget the second half of 2008, when a recession made in the U.S. quickly spread across the globe, slashing commodity prices in the process by more than half in a matter of months.

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So here we are, more than a month into a grinding market pullback, with the S&P 500 down more than 6 per cent from its April peak. And while the CRB Commodity Index is down about as much over the same span, its losses are confined to four awful days at the outset of May. Since May 6, the CRB is actually up more than 3 per cent, bucking traders' growing distaste for risk and the abrupt slowdown in the U.S. economy.

Pessimists might contend that this is 2008 all over again, when commodities peaked long after stocks, shrugging off U.S. troubles until European growth also stalled.

But there are important differences this time around. In 2008, the economic expansion was already five years old, whereas this cycle only started two years ago. Most commodity prices were significantly higher then than they are now, even though demand has come on strong.

We've also had two more years of exceptionally fast growth in emerging markets, which means they're that much more important to the direction of commodity prices. And since emerging markets are still growing very briskly, so is commodity demand, on the margin.

Commodity stocks have been hit hard, of course. Since April ended, gold miners and oil drillers have been among the market's biggest dogs.

But the underlying commodities tell a different story.

Gold is a mere 2 per cent off its record high, during what's supposed to be a seasonal lull.

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Oil refuses to stay below $100 a barrel despite the Saudis' stated preference for lower prices and notwithstanding modest erosion in U.S. gasoline demand.

Copper , the supposed economics PhD, is less than 15 per cent off its barely affordable record peak and holding $4 a pound as Chinese inventories dwindle.

Aluminum, another metal sensitive to economic conditions, has also held up well.

And even silver , written off after its "crash" in May, has stabilized at levels that were only reached in March for the first time in 30 years.

Perhaps the most bullish action has taken place in grains. Corn has now surpassed the record set in 2008, amid worries about the U.S. crop after rains delayed Midwest planting and flooding claimed more acreage. The U.S. Department of Agriculture has just slashed its crop forecast for corn by 23 per cent from last month's estimate.

Wheat's in rally mode as well, because of drought in China, Europe, and Texas.

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It takes several pounds of feed grain to produce a pound of meat. And meat is one of the first luxuries poor people in the developing world buy as soon as they can afford it. The Chinese eat a third more meat per capita than they did a decade ago, but less than half what Americans consume today.

So grains appear to be benefiting from demand growth not confined to the current economic cycle. At the same time, there are worries that climate change and soil depletion are acting as long-term restraints on supply.

I'm a long-term holder of a grains proxy, the iPath DJ-UBS Grains ETF , in the retirement accounts I manage for relatives, and it looks ready to break out after weathering the recent pullback with a minimum of damage. The other commodity investments in the same portfolios-copper miner Freeport McMoran and two flavours of gold miner ETFs, the Market Vector Gold Miners ETF and the Market Vector Junior Gold Miner ETF have not held up as well, or even as well as the prices of the metals they sell.

But if the correction does not presage a major global downturn (and chances are, it won't), I expect commodity stocks to lead the comeback.

Igor Greenwald is a senior editor with

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