Once dismissed as obscure and dull, commodities have become modish markets. Commodity futures, from natural gas to palm oil, are no longer the territory of specialists, merchants and industrial buyers but have become a speculative playground for hedge funds and other professional investors.

The extra liquidity provided by financial investors has stoked hot markets with more fuel, but the question is whether pinstriped investors are riding the crest of a wave or some new factor has created a virtuous circle for commodities.

What has changed is the price cycle of a whole range of commodities, notably metals, which have remained stronger for much longer periods than previously has been the case. The critical factor is Asian economic growth. A surge in demand for crude oil in China in 2004-05 surprised an industry that had severely cut back investment levels since the oil price collapse of 1998. Likewise, mining companies had been keeping their powder dry, fearful of the boom-to-bust metals cycle, where a two-year period of strong prices provokes investment in new mines, which in turn kills off the price recovery with an oversupply of metal.

The question is why the current price boom is not being killed off by excess supply. Several factors seem to be at work. First, demand for energy and raw materials is rising. Secondly, consolidation has reduced the number of players. For example, more than 80 per cent of the seaborne iron ore trade is now controlled by three companies: BHP Billiton, Rio Tinto and CVRD. They have no common interest in overproduction.

Finally, commodities are highly politicised. The Opec cartel has proved effective in restraining output to maintain the oil price above $60 per barrel. There is no reason why it should not continue to be successful as the West’s oil majors are finding it difficult to increase their output.

Rash political gestures are causing havoc in agricultural markets, putting new demands on crops and causing huge price volatility, to the delight of hedge funds creating a new fashion for soft commodities. All these markets are specific and volatile and those seeking common factors are more likely to find pitfalls than riches.

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