A year ago, Bottom Line spoke to noted investor and author Jimmy Rogers of "Hot Commodities" fame -- whose message was an undifferentiated "buy." Buy commodities across the board; don't sell commodities; and, in short, be long.

Rogers was not only right; but had some proper internal picks, favoring sugar, coffee, and copper, all of which have outperformed even the rest of the group.

Today, precisely given the magnitude of those increases, the question is, are there now "shot commodities" that are ripe for the shorting? And which ones?

A market of (commodity) stocks

It's often said of equities, "it's a market of stocks -- not a stock market," or in the words of cautious forecasters, "this is a stock-pickers' market." (God bless the folks at CNBC for heaping appropriate scorn on that clich� in recent years.)

Well: sauce for the gander, it seems to me, for commodities. If in doubt, sell. But there's still time to buy in on energy and perhaps, some energy-related farm goods such as corn and sugar.

There's always the potential for a final gasp of strength in copper, aluminum, and gold -- just as the Nasdaq in 2000, or U.S. housing prices in early 2005, enjoyed the view from on high before leaping back to reality. As those analogies suggest, however, there's more downside potential than upside.

Copper top

The strongest reason to be out of the metals is the global economy, which probably peaked in the first quarter, or is peaking now -- and will be flat, or mildly down, in the second half of 2006 and early 2007. Yet there are particular reasons, too.

The U.S. housing market has now, as we warned last July, entered a multi-year decline. Not only will this indirectly slow commodities down, as over-leveraged consumers have to curtail spending, and banks, lending. It will also have a direct impact on, for example, copper -- of which the housing industry is a major buyer.

In many other countries -- Australia, Britain, Germany -- real estate turned down years ago. In others -- even India and China -- an actual downturn isn't likely, but the peak rate of growth has passed.

Over on the supply side, inventories of many commodities has thinned, due to strikes (Mexico, Nigeria), nationalizations (Venezuela, Bolivia), and downright riots (China).

For the metals, however, much of this is past news. The mining strikes are winding down. Drastic policy changes, to the extent they've happened, have, well happened. As unfair as (for example) the takings by Venezuela and Bolivia are, they do not destroy or necessarily interrupt any supply. In the long-run, they're a disincentive for companies to invest in new production in those countries, but in the near term, the de facto theft has worked.

By contrast, the Middle East remains a cauldron of resentments and potential disruptions. Of the major energy suppliers to the United States, America has launched a trade war with one (Canada), attacked another (Iraq), threatened two more (Iran and Venezuela). We're on good terms with Saudi Arabia, but how long can the princes last, especially against a background of nuclear brinksmanship in the region? Natural disasters in the Gulf, and bad policy in Washington, threaten what little secure supply is left in the world.

Looming somewhere in the background is Federal Reserve Chairman Ben Bernanke, facing the awful tradeoff of appearing to tough, and shutting down economic growth, or appearing too soft, and fueling an inflation scare. (The latter would probably be followed -- e.g. is likely to be in the coming months -- by at least a mild, "growth" recession. If not worse.)

The Bottom Line

Stuck in the middle with nowhere to go, Bernanke has sought a third route -- indicating he's uncertain what to do until more data come in, and then, complaining about the market's confusion over what data he's looking for and how he'll act on them. Commodity prices? Real GDP? The yield curve?

It's a mystery, which is why there's still room for a further run in the energy sector this summer and fall. But the smart money will be looking to short positions on copper and the mining stocks, while stocking up for one last run in oil to $100 a barrel.

Today, too much ease and inflation; tomorrow, an overdue but possibly overdone tightening, and investor confusion; the day after tomorrow, recession. Consult your economic history books under 1971-74, 1979-1982, and 1990-92. We're well into that cycle, hence: buy energy, short the metals, sell equities, and start nibbling at debt.

Gregory Fossedal Gregory Fossedal, [email protected], is an advisor to international investors on global markets and ideopolitical risk

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