From the Dutch tulip craze of 1637 to America’s dot-com bubble at the turn of the century, history is littered with speculative frenzies that ended badly for investors.

But rarely has a mania escalated so rapidly, and spurred such fevered trading, as the great China commodities boom of 2016. Over the span of just two wild months, daily turnover on the nation’s futures markets has jumped by the equivalent of $183 billion, outpacing the headiest days of last year’s Chinese stock bubble and making volumes on the Nasdaq exchange in 2000 look tame.

What started as a logical bet -- that China’s economic stimulus and industrial reforms would lead to shortages of construction materials -- quickly morphed into a full-blown commodities frenzy with little bearing on reality. As the nation’s army of individual investors piled in, they traded enough cotton in a single day last month to make one pair of jeans for everyone on Earth and shuffled around enough soybeans for 56 billion servings of tofu.

Now, as Chinese authorities introduce trading curbs to prevent surging commodities from fueling inflation and undermining plans to shut down inefficient producers, speculators are retreating as fast as they poured in. It’s the latest in a series of boom-bust market cycles that critics say are becoming more extreme as China’s policy makers flood the financial system with cash to stave off an economic hard landing.

David Fuller's view

There are clearly more influences on the international commodity markets than production and consumption, as these strategic resources are increasingly traded in the world’s leading financial centres.  Much of Monday’s downward dynamics in commodities, including precious metals, occurred in response to the news of China’s latest tightening of margin requirements. 

These markets were short-term overextended at the time, so susceptible to a correction.  Investors and traders cannot be aware of every possible eventuality in markets, and commodities can be volatile as we have seen on numerous occasions.  A sensible strategy for investors who participate in volatile markets, particularly leveraged futures contracts, is to keep positions well within the size of your capital for these ventures.  Moreover, be careful about chasing or over staying in trends where long positions are clearly short-term overbought, evidenced by stochastic indicators which are available in the Chart Library.  The same applies to short-term oversold conditions when holding short positions. 

On average, it is better buy following shakeouts and to sell after sharp rallies.  One can also use stops to limit risks but these will more than likely be triggered in volatile conditions.