The commodity market bulls will run out of puff next year

For years now it has been an article of faith among brokers and a good many investors that commodity prices can only climb higher.

They believe commodity markets are mid-way through a 20-year super-cycle. Their argument is that limited supplies, coupled with solid demand from the mainland as it raises living standards and builds up its meagre capital stock, will propel a multi-decade bull market in everything from soya beans to zinc.

It's an enticing story, and one backed by the price performance of major commodities over the last 10 years. Both oil and copper, for example, have risen by more than 400 per cent. Even rice - hardly the most widely traded commodity - has climbed by 260 per cent.

So it is no surprise that many of the brokers that have so enthusiastically promoted commodities as an investment over the last 10 years are sticking with their bullish calls for 2012.

Goldman Sachs, for example, is forecasting that the price of crude oil will climb 19 per cent by the end of next year, while zinc will rise 20 per cent and copper 22 per cent.

Yet investors should be wary of these predictions of handsome near-term gains. Commodity prices have indeed risen over the last decade, but they have also shown extreme volatility (see chart). Since the beginning of May this year, for example, the widely followed Rogers International Commodity Index has slumped by 17.5 per cent.

There may be more price falls to come in 2012. Commodity enthusiasts typically base their bullish price forecasts on projections of growing demand from the mainland. And it is certainly true that China has emerged in recent years as by far the world's biggest consumer of some commodities. In 2010, China accounted for 37 per cent of world demand for copper, 41 per cent of aluminium demand and 57 per cent of iron ore demand.