Commodities are back. After collapsing spectacularly between last summer and early spring of this year, commodities just posted their strongest month since Richard Nixon was president. Trading at a seven-month high, the S&P GSCI spot commodities index is up by almost one-third in 2009. The surge has been broad based. Crude oil just had its strongest month in a decade. Both gold and silver surged well over 10% in May. Soft commodities like corn and soybeans hit levels not seen since last September. Risk appetite is clearly returning to global markets as a growing number of institutional investors are going overweight on commodities.

The Commodity Bull is Back: "Supercycle" Still Intact

The recent jump in commodity prices has caught some analysts off-guard. After the collapse in commodities prices last year, the "commodities supercycle" became another embarrassing example of overenthusiastic speculation. Yet the long-term case for commodities never really went away. The rationale behind it -- collapsing supply and exploding demand from the world's emerging economies -- holds up as much as it ever did. Global supply of commodities remains in a sharp decline after 35 years of under investment in production. The last lead smelter in the United States was built when President Obama was eight years old. There has been no major (onshore) oilfield discovery in the last 40 years. Peak oil advocates expect there will be little if any oil left by 2020. Ironically, the global recession has only made the long-term case for commodities that much stronger. The collapse in global commodity prices has meant that pending oil exploration and mining has fallen twice as much as originally forecast.

The long-term case for soft commodities also remains strong. The world's population continues to increase; diets are becoming more crop intensive; and biofuels are catching on. In a decade's time, land per person for animal and crop production will be half of what it was in 1970. Short-term factors also support arguments for soaring wheat, corn and soybean prices. Winter wheat production by U.S. farmers is expected to drop 18% compared with last year. Corn prices have soared as bad weather has reduced crop yields. Sugar prices are jumping as production collapses to levels last seen a decade ago.

The Commodity Bull is Back: A Top "Reflation Trade"

As the debate between "deflation" versus "inflation" continues on the world's op-ed pages, Nassim Nicholas Taleb, author of the 2007 best seller "The Black Swan" has placed a very public bet on the side of soaring inflation. Affiliated with the Universa hedge fund -- up 100% last year by profiting from a collapse of global stock markets -- Taleb is now launching a fund that will bet that the massive stimulus efforts of global governments and central banks will lead to hyperinflation. Taleb intends to make his next fortune by investing in options tied to corn, crude oil and copper, as well as options on stocks such as oil drillers and gold miners.

Commodities tend do well when investors seek a safe haven from expected inflation. In fact, many of today's top hedge fund managers made their reputations (and fortunes) trading commodities during the inflationary 1970s. The arguments on the side of inflation are compelling. Today, every central bank in the world is printing money at the same time, injecting the global financial system with massive liquidity. With the worst part of the global financial crisis having passed, central banks will soon need to withdraw money from the system. If they are unable to get it just right, inflation will soar -- as will the price of "real assets" like commodities. The weak fiscal position of the U.S. government means that commodities prices will soar even more in U.S. dollar terms, as the U.S. currency devalues. Consider that measured in euros, oil's rise in the past month has been closer to 22% than the 30% increase quoted in dollars. The "Demise of the Dollar" means that investors will shift increasing amounts of their assets into "real" assets like commodities.

The Commodity Bull is Back: Global demand... or Just China?

Some argue that commodities prices are soaring ahead of an anticipated rebound in the global economy. Yet with oil storage tanks filled to the brim, and the global economy operating well below capacity, some analysts are scratching their heads wondering what's behind the across-the-board rise in commodity prices. The answer may be one word: "China."

While the rest of the world is occupied with bailing out its financial system, China has been systematically stockpiling commodities like copper, soybeans and coal while they are cheap. Coal shipments from Australia to China surged 21% as Chinese utilities loaded up on inexpensive coal. China's demand for soybean imports from the United States soared 31% from the same period in 2008. This is no accident. China has implemented a strategic stockpiling campaign, and has committed itself to purchasing 40 million tons of corn (25% of China's total annual production) and 7.25 million tons of soybeans for strategic reserves. Wheat is next on the list. The government has even announced plans to construct additional storage facilities with capacity of another 15-million tons of grain.

The Commodity Bull is Back: "It's Officially A Bull Market"

It's uncertain how much of the current rise in commodity prices is due to long-term supply concerns, speculators hedging against governments' "easy money" policies or rebounding global (or just Chinese) demand. What is certain is that after selling off sharply last year, many commodities are now trading in an uptrend. The DB Liquid Commodity Index is on the verge of crossing its 200-day moving average for the first time since September. Agricultural commodities like soybeans, corn, and wheat have already done so. Crude oil has doubled from its December lows. Gold is now approaching $1,000. Lumber and copper -- both traditionally "canaries in the coal mine" in forecasting an upturn in the global economy -- are also soaring. Skeptics point out that while some commodities, such as sugar or soybeans boast strong fundamentals, others like platinum and nickel have little except investor sentiment supporting them. Yet in a bull market, the greatest danger is to fail to see the forest from the trees. However you choose to explain the new bull market in commodities, it is best to just hop on and enjoy the ride. After the last 24 tumultuous months, you deserve it.

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