Commodities: boom or bust?

By Jennifer Hill

LONDON (Reuters) - Gold, oil, diamonds, metals: commodities have been booming. But as prices hit record highs, is the bubble about to burst?

Turmoil in financial markets has, some analysts say, pushed prices well above fair market value across energy, metals and agricultural goods as investors take flight to supposed "safe plays".

Heavy profit-taking last week saw commodities -- from gold and oil to grains -- tumble as investors cashed out, taking profits at near-record prices and reducing risk from positions built on borrowed money.

"Gold is priced in U.S. dollars and, therefore, usually suffers when the U.S. dollar prospers, and it's also bought as a hedge against inflation so, consequently, the Federal Reserve's concerns about inflation and its decision not to cut interest rates by a full point are seen as bearish omens for gold," says Andy Gadd, head of research at independent financial adviser Lighthouse Group.

"Investors need to understand that investment into gold and other commodities is not necessarily a one way ride."

The Reuters/Jefferies CRB commodities index -- which includes crude oil, gold, wheat, cattle and corn -- has dropped 8.4 percent -- the largest fall since its inception 50 years ago.

Against that backdrop, some analysts are turning bearish.

"We're bearish on commodities in the short term, primarily due to over-speculation in the markets," says John Davey, a research analyst at broker Bestinvest, "although long term agricultural fundamentals look attractive due to low inventories and positive demand from the food, fuel and feed sectors along with increased westernization of Chinese eating habits."