Is the commodities boom over?

"No stock even a commodity stock is immune from the inflation bogey man,"says Dan Denning on Dailyreckoning.co.uk. As inflation has hit all world markets, it also hits commodities.

Gold may be the classic inflation hedge, but even its price has been edging down as investors worried that all commodities had run ahead of themselves. Indeed, this week it hit a four-week low of just $636 on Monday, from a 26-year high of $732.

Other commodities have seen their values fall. Silver has fallen from $15.20 (a 23-year high) down to around $12.50 (a decline of nearly 18%). Copper has dropped by more than 13% and crude oil is down 8% since mid-April. These large falls make the small gains seen this week (silver rose 5% on Tuesday, for example) look insignificant in the bigger picture.

Not surprisingly, now that prices have fallen back, many commentators are saying that the rash of highs that commodities broke through recently were the peak of the bubble. That would mean that, from now on, the only way is down. Worryingly to contrarian investors, the mainstream press has just jumped onto the commodities wagon normally an indicator that the best is over. On the other end of the scale, veteran contrarian and experienced economist Stephen Roach has just declared that "the world is now in the midst of another bubble this one in commodities. It too will burst. The only question is when".

We have often concurred with Roach's views, but market timing isn't his strong point. Only last week, he dropped his bearish stance on world stockmarkets, just before they all got battered. Even veteran investor Marc Faber last week said commodities look set for a correction of up to 30% over the next few months. But does that mean that the commodities boom is over?

No, we are still only about three years into what if history repeats itself, as we believe it will should be a 20-year super-cycle. Commodity prices may have rocketed in a short period of time, but remember that not only were they artificially low (thanks to investors' lack of interest) for over a decade, but they are still not at highs if inflation is taken into account.

The Chicago Research Bureau's commodities index, for example, is "in real terms, at about 35% of its peak seen in the early 1970s", says David Fuller on Fullermoney.com (see chart, left). Indeed, the recent falls are just a "healthy, normal correction", says Frank Holmes, CEO of US Global Investors. "We think they're [commodity prices] going to appreciate in the next year, and into the future," adds Larry Young, senior trader at Infinity Brokerage. That means there is much further to go from here.

So what should commodities investors do? The long-term story is as compelling as ever even with high prices, production is slow. "New investments today are in production [that] we are not going to see until the next decade, during which time supplies of many commodities will remain tight," points out Jeffrey Currie, head of commodity research at Goldman Sachs, in the FT. But that doesn't mean there won't be short-term setbacks. Just ask investment guru Jim Rogers. Last week, he told CNBC, "in the 1970s, gold went up 600% and then it went down 50% over a two-year period only to turn around and go up another 800% I am not selling any commodities, even if they go down 30%-40% because they will be going back up later". In other words, commodities have a long way to go.

But that has implications for world markets and economies. The increasing prices of commodities will only fuel inflation further. That will strengthen fears of higher interest rates which will further rock world stock markets. Looking at the CRB index, you will be better off investing your money there than relying on the shaky fundamentals of the FTSE 100 or the Dow Jones.

For an alternative view from economist James Ferguson, take a look here: This is not 1987

And for more on the commodities supercycle, read the report below: