Altered landscape riles commodity boom-and-bust cycle Emerging economies, exchange-traded funds help paint the backdrop

TOKYO (MarketWatch) -- The landscape for commodities trading is nothing like it used to be thanks to growth in exchange-traded funds and emerging economies -- and that has made the market's so-called boom-and-bust cycles much more difficult to predict.

"Two factors make the current commodity cycle different from previous ones" -- the growing significance of emerging economies and the emergence of commodity exchange-traded funds and notes, said Sam Subramanian, editor of AlphaProfit Sector Investors' Newsletter

Investments in commodities like oil and copper are "somewhat of a surrogate for investing in emerging markets," he said. And ETFs have "made commodity investing easier for retail investors and transformed commodities into a 'legitimate' asset class."

So while the commodities market cycle is still a "classic boom/bust in its outlines," said Chris Mayer, founder of Capital & Crisis, the "particulars may be different."

The current trading cycle has "more flavor" from the huge emerging markets impact, he said.

And "it's emerging markets that are driving the bull market in this cycle, so as that demand snaps back -- and we're seeing it now -- then the commodity boom roars on," said Mayer, who's also a contributor to The Daily Reckoning.

But Subramanian pointed out that volatility in commodity prices is likely to increase because they're linked to emerging economies.

"Growth often brings instability with it," he said. "Emerging economies due to their rapid growth ... often tend to be more volatile. This volatility is likely to ripple through commodity markets due to fluctuations in commodity demand."

Shaking things up

"Volatile" would indeed be the best way to describe the commodities market as whole, but that's been particularly true in recent years as traders track demand from emerging markets.

Many commodities managed to climb to new highs in the last year or two, only to fall back down as growth -- or the perception of it -- in emerging markets slowed.

In 2008, crude-oil futures peaked around $147 per barrel but before that year was up, they sank below $40. Copper futures topped $4 per pound in 2008, then dropped to around $1.30 by the end of that year. And while gold futures tapped an all-time nominal high above $1,200 more recently in December 2009, they haven't been able to get back there since.

"The ultimate driver of the commodities boom has been the rise of emerging markets through industrialization and urbanization, mainly in China," said Brian Hicks, co-manager of the U.S. Global Investors Global Resources Fund(PSPFX 9.25, +0.18, +1.98%).

The Chinese implemented a stimulus program for infrastructural works and eased credit, leading to a new building boom, and Chinese domestic car sales exceeded U.S. car sales in 2009 for the first time, said Gijsbert Groenewegen, a managing partner at Silver Arrow Capital Management.

All of that helped raise demand for commodities such as iron ore and copper.

'Copper is still an economic bellwether, but it's the emerging economies rather than established industrial economies that it speaks to.'

David Coffin, HRAAdvisory.com

There's been a "slackening" of copper demand in the industrialized world since about 2000, but total demand has continued to grow at a steady pace because of emerging market growth, said David Coffin, co-editor of the HRA publications at HRAAdvisory.com.