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.
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."
Gold is typically viewed as a haven of stability when inflation is eroding the purchasing power of paper currencies such as the dollar.
Some analysts say it is no coincidence that a surge in commodities began in earnest around the same time the Federal Reserve began cutting short-term interest rates last fall. That monetary easing has continued this year, with Fed officials signaling that further rate cuts are likely in a bid to stabilize the housing and credit markets.
"I'm still quite bullish" on gold, says Dennis Gartman, a commodity analyst who publishes the Gartman Letter in Suffolk, Va. But if the commodity rally may run for a good while, some of the money flows simply represent investors who hope to buy high and sell higher.
"The folks in the grain business are very upset about the fact that so much speculative cash is flooding into the grain market," Mr. Gartman says.
Commodity cycles historically can last a decade or more, so the current bull run could have staying power even though oil and gold have been rising for several years now.
Buoying demand, also, is a long-term shift among investors looking for the best way to diversify their portfolios.
Increasingly, "alternative" asset classes such as commodities are seen to play a vital role even for everyday investors. The idea is that during bad times for stocks and bonds, these alternatives provide a beneficial offset.
Commodities have traditionally been the province of arcane futures and options contracts. But now investors can easily buy in using mutual funds and exchange-traded funds. Large investors such as pension funds have popularized the concept. The question is whether the benefits of commodity investing will persist when so many are following that strategy.
Another wild card is whether the demand for commodities from emerging markets will continue in the face of a slowdown in key export markets – the US and Europe.
"I don't buy that," says Mr. Kasriel.
But some forecasters say commodities will remain strong. High oil prices, for example, may reflect a long-term outlook for tighter supplies. Rex Tillerson, who heads Exxon Mobil, said in a CNBC interview this week that speculation may be adding $10 to $20 per barrel of oil.
Rising prices for wholesale materials don't have to mean that consumer inflation goes up. Still, worry has grown that US inflation could rise beyond its recent annual rate of about 4 percent. David Ranson, an economist at H.C. Wainwright & Co. in Beverly, Mass., predicts a good next five years for oil, but that the stock market will do better still.