This doesn't mean I know the commodity market has peaked. Hedge-fund investor John Paulson, now legendary for shorting the subprime mortgage market and for betting on gold, remains a big gold bull. I'm even less inclined to predict the future direction of commodity prices than I am the direction of the stock market. What I do know is that these assets have had huge run-ups, at rates that simply can't be sustained over long periods of time.
I still maintain that all investors should own hedges against the possibility of future inflation, and commodities and stocks of commodity producers provide such protection. But in my view they shouldn't exceed 10 to 20% of a portfolio for most investors—and now is the time to rebalance.
It's good advice in general; my only quibble is with the timing. The plummets in inflation-linked commodities seem to be over right now. Even if they're destined to keep falling, a plummet of this magnitude often offers a second chance to get out through a relief rally. Rebalancing now would mean selling prior to a possible relief rally.
As a matter of timing in general, although it tends to being out the queases, the best time to rebalance is when everyone thinks the inflation hedge in question can go nowhere but up. With respect to gold, a good indicator of a near-top is when I throw in my hand after making warning noises about a pullback. I have to admit that I'm no pro when it comes to timing.
Disclosure: I should add that I threw financial prundence to the wind earlier this morning and bought some precious metals on my credit card. Not gold, but a 100 oz. bar of silver. I figured that the gray metal was at least due for a bounce, so I now have an interested opinion about where silver's going to go. Although I don't own any gold, my position in silver is likely to spill over into optimism for the yellow metal. Just letting you know so you can discount any optimistic noises from this blog.