Air leaks from commodities' bubble

Commodities were up to the same old tricks for most of the first quarter, rising to new records as global stock markets struggled.

But the sector hit a big bump in mid-March. The dip, followed by heavy selling on the last day of the quarter, raised concerns that a multiyear bull market might end soon.

The Dow Jones-AIG commodity index, which tracks precious and industrial metals, energy and agricultural futures, has climbed 14 percent this year through March 18.

After the Federal Reserve cut its benchmark funds' rate target by a less-than-expected 0.75 percentage point that day, the index lost 6 percent during the next two days. It still ended the quarter up 9 percent.

"The idea of bubbles bursting is well known, but determining the moment when the mind-set changes seems near impossible," writes Citi Investment Research strategist Tobias M. Levkovich.

"Indeed, many money managers were aware of the unfathomable dot-com valuations or the unsustainable home-price appreciation, but participated in their stock price momentum for some time," he says, citing other bubbles.

Global economic growth — a key driver of commodities gains — is moderating, notes MF Global analyst Edward Meir.

Another driver, inflation worries — hard assets are seen as a hedge — could be easing, too. Higher U.S. job losses may keep prices in check by reducing demand, writes Levkovich.

Also, large institutions' investments, often using debt, fueled commodity gains. As hedge funds and other entities unwind these investments amid tight credit conditions, commodity prices could fall further, writes Meir.

Not all analysts think the run is over. Barclays analyst Gayle Berry still sees gains, particularly for oil and agricultural commodities, due to low supply and high demand.