Will commodities boom last

A bull market in commodities has become the big way for investors to make money this year, but it could also be just another price bubble that will build up only to deflate.

What's clear is that trading in raw goods – things measured in bushels, barrels, and ounces – is a strategy that's working for investors, at a time when gains in traditional stocks and bonds have grown scarce.

Oil prices surged this week above $105 per barrel, an all-time high even after adjusting for inflation. Gold neared an unheard-of $1,000 per ounce. A huge run-up in grain prices is enough to make bakers rethink their traditional definition of a dozen.

Are prices for these items outrunning their fundamental value?

In each of these cases, investors can cite solid reasons for the gains. These include tight supplies of energy, the way that rising concern about inflation ignites demand for gold, and tough weather for many of the world's farmers. But some analysts also say that in each case, speculation and a big money shift by investors has been an important factor as well.

"In any of these [booms] there's always a kernel of truth to them – maybe a whole ear," says economist Gary Shilling, who is currently visiting Kansas wheat country. "What you do know is that when the speculation starts, it does reinforce itself."

Many analysts don't see the commodity boom as having already entered a bubble phase. But Shilling, who runs a research firm in Springfield, N.J., is in the camp that sees the run-up as inconsistent with signs that the economy is cooling worldwide, led by what he says is already a recession in the United States.

If the recession forecast holds true, he says, "I think we'll see demand decline enough that investors will rush out."

In recent years, boom times have rolled through a succession of sectors or "asset classes," to use financial jargon. In the late 1990s, it was technology stocks. During this decade, small-company stocks, emerging-market stocks, and of course real estate prices all saw big run-ups. In two of those cases – high-tech and housing – the surge reached bubble proportions followed by a bust.

This year, stock markets worldwide are struggling. All but the safest bonds have appeared vulnerable to ripple effects from the housing bust, which has engulfed many debt markets.

By contrast, the commodity boom has continued unfazed. Benchmarks of oil, gold, and agricultural prices have all risen by 50 to 60 percent in the past year, with much of that rise in the past two months.

A central reason: the growth of developing nations. From China to Africa, they are using more commodities, and in many cases they also benefit when the price of those materials goes up.

The trend also draws strength from concerns about a resurgence in inflation. "This is often the environment when investors turn to commodities," says Paul Kasriel, an economist at the Northern Trust Co. in Chicago. "I'm not that surprised about gold."

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