But what will happen to the small investors, pension funds and charity endowments who have decided to make their fortunes by buying up copper, steel, oil and other commodity assets, belatedly inspired by the sensational riches accumulated by the likes of Roman Abramovich, T. Boone Pickens and Lakshmi Mital? The chances are that these recent passengers on the commodity bandwagon will do no better than the tardy followers of Bill Gates, Michael Dell and Chris Gent.

The fact is that commodity prices — many of which have risen fourfold since 2003 and have doubled during this year alone — are rising on several false assumptions. The first is that the world economy will continue to grow very rapidly, as it has done since 2003. The second is that rapid global growth will cause demand for commodities to outstrip supply. The third is that even if demand growth did slow, commodity prices would be supported by the geopolitical and inflation risks created by President Bush’s confrontation with Iran.

I have written in previous columns about my reasons for believing that the world economy would suffer what I call a mid-cycle slowdown, though probably not outright recession, in the year ahead, so let me concentrate on the other two arguments. The idea that even 5 per cent global growth would deplete global supplies of base metals such as iron ore, zinc or copper completely contradicts the experience of the past 50 years, which shows that the world economy can grow rapidly for decades while commodity prices have declined steadily in relation to other goods and services (see charts). Of course, this downward trend could not continue forever and a gradual recovery in commodity prices made good sense from the start of this decade onwards. But to rationalise the price explosion of the past 12 months would require a very dramatic change in supply and demand prospects — and there has been nothing of the kind.

For example, the International Copper Study Group last week published global demand and supply estimates, suggesting that the copper market would end 2006 with a “modest” supply surplus, after an “essentially balanced” market at the end of 2005. Given that this balanced market triggered an unprecedented 150 per cent four-month price increase, some other forces must have been at play — and the nature of these forces is fairly clear. Financial investors have been buying up oil, gold, copper and other commodities with little or no regard to the underlying supply-and-demand relationships, in a feeding frenzy very reminiscent of the 1990s’ technology boom.

In the case of oil and gold, there are at least some rational grounds for such speculation. Even if liquidity is drained from the global economy, if interest rates rise further than expected and if growth begins to slow around the world, oil and gold could easily remain in a powerful bull market for reasons that have nothing to do with the economic outlook. Oil and gold prices now incorporate a significant risk premium, reflecting the serious possibility of major supply disruptions connected with geopolitics. Suppose that America or Israel decided to bomb Iran. Without trying to speculate about the full geopolitical implications — for example, whether such an event would deter or encourage Iran’s nuclear programme — we can focus on one simple and predictable consequence of an attack on Iran. Iran would probably retaliate by closing the Straits of Hormuz, the shipping channel that carries 40 per cent of the world’s oil exports. In consequence, the price of oil would presumably shoot up to $100 or even $150. Gold would quite rationally jump in sympathy – maybe to $800 an ounce or even $1,000 – since the world economy would face a risk of stagflation and geopolitical conflict greater than at any time since the Yom Kippur War of 1973.

But how would copper, zinc and other industrial commodities respond? To judge by the behaviour of the markets, base metal prices would be expected to rise in parallel with oil and gold — maybe even more steeply. That, after all, is what has been happening since early 2005. Whenever oil has risen in response to some new geopolitical threat or potential supply shock, the gold price has moved in tandem and other commodities have also jumped. But does this make sense?

A war or embargo in the Middle East — or a revolution in Nigeria or Venezuela — would certainly cut oil supplies and therefore boost the oil price, but such geopolitical upheavals would do no damage at all to the supply of copper or zinc. It would take revolutions in countries such as Chile, Australia and Russia to interrupt base metal supply. And even if such revolutions did happen, they would have only a marginal impact on global copper or zinc supplies because these minerals are much more evenly distributed around the world than oil. Yet while political upheavals in the Middle East would have no effect on global supply of base metals, they would have a very big effect on demand. Another oil shock would devastate industrial production and therefore commodity demand.

With industrial demand dropping, while commodity production remained unaffected, the market price of copper, zinc and other base metals would collapse. If the Straits of Hormuz were closed tomorrow, the price of oil would probably soar from $70 to $150 and gold might jump from $650 to $1,000 — but the price of copper would plunge from $8,000 to $4,000 a tonne.

Today’s unpredictable geopolitics may justify a supply-risk premium for oil and gold. Base metals, by contrast, should suffer a discount for demand-risk — and they will when investors start to think more rationally about commodities and global shocks.

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