The Cure For High Commodity Prices Is High Commodity Prices

From the WSJ:

The months-long rally in commodity prices has sparked fears it could ignite inflation or cripple consumer spending. But a surprising trend is now sweeping the markets for some key materials: Prices are falling.

Goods from cotton to zinc that were highfliers late last year have turned into laggards in recent weeks. Several have logged double-digit-percentage declines in futures markets.

Cotton has pulled back 17% from the all-time record set in early March, and sugar is down 34% from its multidecade high in February. Lead and zinc have tumbled in recent weeks after shooting up in the second half of 2010. Copper has shed 6% this year.

The declines came amid a wild April in which other raw materials continued to climb. U.S. oil prices rose 7% for the month, while gold set fresh records in nominal terms 13 times and silver neared its all-time high.

The wild ride continued early Monday, when spot silver suffered one of its worst drops on record, falling 12% in 11 minutes at its most severe. It opened at $47.863 an ounce, rose to $48.150, then in 20 minutes fell to $42.210 before stabilizing. The selloff also hit spot gold, which fell 2.2% in just over a half-hour to $1,542.61 an ounce from $1,576.52.

Reasons vary for the pullbacks. Prices for some materials have fallen as ample production has eased shortage fears. The appetites for others have faltered after China and other fast-expanding nations moved to tamp down growth.

But the declines could also signal that prices rose too sharply in recent months and became unmoored from fundamental forces of supply and demand, which typically reassert themselves over time.

"A lot of those markets were technically overbought," said Brad Zigler, editor of Hard Assets Investor, an online newsletter. "Commodities are a volatile asset class, and you've got to anticipate that what goes up fast can come down fast."