Stephen Roach Chief Economist, Morgan Stanley "Base metals prices were moving up parabolically. China was sending signals of its intent to reduce the energy and commodity content of its GDP. This triggered my concerns"

Jignesh Shah Chairman, Multi Commodity Exchange "As an exchange, we have to manage the risks when such bouts of correction happen, and that's why we increased margins in various base metals"

"The world is now in the midst of another bubble - this one is commodities. It, too, will burst."
Stephen S. Roach, Chief Economist, Morgan Stanley

"Anyone who says commodities have been in a bubble has not done his homework and does not know about what he is talking"
Jim Rogers, Global commodities Guru

Last fortnight as commodities of all hues slipped into a downward spiral globally after years of a breathless uptrend, the billion dollar question on traders' lips worldwide was: Are we in for speculative blow-out? The tell-tale signs were all over the place (including in global equities): Base metals like copper, zinc, steel and aluminum were XX per cent off peak prices in a weak. To be sure, no commodity was spared, be it precious metals (gold, silver, platinum, palladium) or sugar, or cotton, or wool. Whilst most traders were caught on the wrong foot, there were those who saw it coming. "Base metal prices were moving up parabolically in April and early-May, with copper doubling in a little over a month. At the same time China was sending signals of its intent to reduce the energy and commodity content of its GDP over the next several years. There was a major macro disconnect that triggered my concerns about commodities as an asset class," Morgan Stanley's Roach told BT. Roach had turned bearish on commodities before last fortnight's plunge in prices began.

Then there are investors like Jim Rogers, a dyed-in-the-wool guru in commodities, with books like Hot Commodities to his credit. Try mentioning the word "bubble" to Rogers, and he's likely to rubbish you with disdain. He did exactly that to BT last fortnight, armed with an array of statistics. "Sugar is 80 per cent below its all time high; cotton 60 per cent; maize 50 per cent; soyabeans 60 per cent; silver 75 per cent; coffee 70 per cent; palladium 60 per cent; gold 30 per cent. If you adjust the hold highs for inflation, these and many others are 85-95 per cent below the all-time highs. What kind of 'bubble' is it when most things are 85-95 per cent below all-time highs," scoffs Rogers.

Rogers obviously knows what he's talking about. But at the heart of the bear theory is the question whether commodities deserve the highs they've been driven to in the first place? Should gold be at $700 per XX, copper at $4 per XX and oil at $70 per barrel? As Roach argues, there's nothing extraordinary about the global economic climate today to warrant such an uptrend in commodities, an uptrend that's pushed prices to their highest levels in the pat 35 years. There have been five periods of prolonged spikes in economic activity since the seventies. The current rebound, which began in 2002, averages 4.2 per cent in annualized world GDP growth terms. That's lower than the 4.4 per cent average annualized gains in the previous four global recoveries between 1970 and the 90s. Why then should commodities prices be at a 30-year all-time high? The Journal of Commerce composite gauge of industrial materials prices, which has four components (textiles, metals, petroleum products and a miscellaneous group), but which excludes agri-products and precious metals, has increased by 53 per cent over the past four years, the sharpest ever run-up since 1970.

The bull camp would feel such comparisons are odious, as there's one major piece in today's global economic picture that one didn't have to contend with prior in the 1970-2000 period: China. In 2005, China swallowed close to 9 per cent of the world's crude, 20 per cent of global aluminum, at least 30 per cent of steel and 45 per cent of the world's cement. And as the thrust continues to be on infrastructure and urbanization, a section of traders believes China will ensure that the rally in commodities doesn't peter out.

The bad news, going forward though, is that China is attempting to move away from investment-led growth to consumer-led growth (as is happening in India). And this will reduce its appetite for commodities sharply, thereby hitting global demand in a big way. Result? Prices will crash suddenly, and traders will be caught napping. Back home in India, where commodities markets have been racking up turnovers of Rs XXXX crore in daily trading, traders and analysts are treading with caution. Says Jignesh Shah, Chairman, Multi-Commodity Exchange (MCX): "Indian markets have shown a huge correlation with the world's commodity markets. As an exchange we have to manage the risks when such bouts of correction happen, and that's why we increased margins in various base metals." Adds Suresh Nair, Vice President (Commodities), Kotak Securities: "The commodity market was in overbought region for some time. After a rise of 100-120 per cent, a 15 per cent correction is healthy." Echoes Navin Mathur, Head (Commodities), Fortis Securities: "A market that makes a record almost every day is not sustainable for long." Trading in commodities from hereon isn't for the faint-hearted.