Oil prices continue to hover around $70 a barrel, and gold is in the mid-$900 range. Meanwhile the CRB Continuous Commodity Price Index has surged to a level 30% above its March low.

Finally, copper, supposedly a barometer of the global economy, went above $6,000 per metric ton – up more than 96% this year.

And while prices for most commodities are still well below last year’s peaks, the price spike is more dangerous than it looks.

Normally, commodities prices zoom at the top of a global inflationary boom, as in 1973, 1980, or last summer. This time, the surge is happening at the bottom of a recession. If it continues, the commodities price resurgence could cut off global recovery before it really gets going.

Commodities prices usually take off at the top of a normal business cycle, as inflation is accelerating. The price rise then causes commodity consumers to feel poorer. This reduces demand and brings on a recession. Then, new production capacity comes on stream after demand has fallen back, causing prices to remain depressed for several years.

That’s what happened in 1973, with the first Organization of Petroleum Exporting Countries (OPEC) oil price rise, and again in 1980, with the second. After 1980, we didn’t see a real commodities price surge until the middle 2000s. That’s because the tech revolution caused consumer demand to move to things like computer chips that used fewer raw materials than traditional products.

Last summer, we had a similar price peak. Given the depth of the current recession, you’d expect commodities prices to stay low for several years, as new production capacity comes on stream. But that hasn’t happened. Instead, prices have rebounded sharply.

There are three possible reasons for this year’s surge.

First, it could be the result of very low interest rates and loose monetary policy. In that case, it will soon lead to a rise in general inflation.

It could also be due to the worldwide fiscal stimulus – in the United States, China, the United Kingdom, India and most other economies. Much of the stimulus - particularly in China – consists of infrastructure spending. Infrastructure development requires lots of steel, copper, cement and other commodities. If that’s the case, the resulting budget deficits are likely to cause bond market problems. That would restrict the supply of funding for capital investment and other private sector needs.

Finally, the surge in commodities prices could be due to continued rapid growth in India and China. The 2.4 billion citizens of those countries, as they get richer, are demanding more goods that require a lot of commodities to produce, like automobiles.

Thus, when India and China grow faster than the rich West, we can expect commodities demand to surge more than global gross domestic product (GDP). If this is the cause, rapid commodities demand will lead to a rise in general inflation and spot commodities prices that will accompany shortages and price spikes. That would have a deflationary effect on output.

We saw this effect in 2008’s third quarter, when real U.S. GDP dropped 2.7%. That drop must have been the effect of $147 oil in July, since the financial crisis did not hit home until the very end of that quarter.

It’s impossible to tell which of these three is really causing the current commodities price surge. We can, however, be sure that it will choke off global recovery if it carries on much longer.

That’s a miserable possibility, especially if it means we also get inflation and higher interest rates. However, as investors we can make some money from the commodities surge.

Here are some ideas:

Powershares DB Base Metals Fund (NYSE: DBB): This exchange-traded fund (ETF) tracks the Deutsche Bank AG (DB) base metals index, allowing you to invest directly in the price movements of non-precious metals. With a market capitalization of $308 million, it is reasonably liquid. Plus, a lot of money has been flowing into it recently.

Vale S.A. (NYSE ADR:VALE): Vale is the world’s largest iron ore producer and a key supplier to China’s exuberant infrastructure growth. Historical P/E of less than 10; will benefit hugely from price run-ups in steel.

iShares Silver Trust (NYSE: SLV): This ETF Invests directly in silver bullion, which has been left behind somewhat in its relationship to gold’s price rise and can be expected to move up as gold does, possibly by a much greater percentage.

Market vectors Gold Miners (NYSE: GDX): Gold miners benefit disproportionately from a rise in the gold price because their production costs are fixed. They are thus a more leveraged way to play it than the metal itself, particularly as surging speculative demand can increase mining companies’ price-to-earnings (P/E) ratios.

Four Ways to Profit From Resurgent Commodities Prices

Meanwhile, listed financials have gone from shaky to shaken.

That’s no coincidence. The fear surrounding banks sparked a stampede of financial capital. A lot of it has charged into the commodities sector. The tide of money flowing out of financials is gushing your way.

There are Always Good Resource Stocks…

But tangible assets…and resource companies…are a truly diverse bunch. They come in a variety of shapes, sizes, weights and uses. That diversity ensures there will always be something making gains. Commodity buyers always want more of something than there is available. That’s the beauty of resource investing. You have access to a constant stream of good investment ideas. It’s like a whole separate investment universe.

Unconvinced?

Well, the market was flat for all of February. But Alumina (ASX:AWC) was up 23% because Chinese aluminium demand sprouted wings. In the first half of March, the market was down 4.5%. But iron ore junior Midwest (ASX:MIS) had an explosive 20% gain thanks to a takeover offer.

Tangible assets are in a long-term bull market. Even when the whole share market is floundering… somebody, somewhere is making money in the resource sector. But in their haste for obvious profits, speculators can miss good opportunities.

There are two specific opportunities in particular we’re looking at. These come from two sectors of the Australian resource market that speculators haven’t blown up. Separately, they’re great companies. But together they combine two of the most profitable aspects of the resource boom, with synergies to boot.

We don’t expect this opportunity to stay at the price it is today, though. Money moves towards quality, and this pick is of a high standard. With that in mind, let’s quickly recap the exodus from financials to resources.

Funds Look for Inflation Safety in Commodities

Apart from the fact that resource stocks are in a historic bull-market, a lot of this buying motivation comes from inflation. Commodities tend to outperform other asset classes in an inflationary environment. Speculators are using the resource market as a shield against rising prices.

This is evident in Exchange Traded Funds (ETFs), which track the prices of the commodities they hold.

The Goldman Sachs Oil ETF has added around 22% since last year’s calendar came off the wall. The PowerShares DB Agricultural Fund is up 18%. StreetTRACKS gold ETF (NYSE:GLD) is up 16%.

Here’s an interesting one… the Powershares DB Base Metal Fund (AMEX:DBB). It’s up 13% over the last three months, despite most metals taking a breather.

These high commodity prices are pulling headline companies up with them. Global miner Xstrata (LON:XTA), for example, is up 7% for the year in London, despite the London market being down 13%.

Speculators have definitely moved into the hard asset market. But now that they’re here… what will they do next?

The Factors of Speculation

Different speculators hold different positions on the market’s direction. You could easily identify dozens of difference factors, all of which have the potential to drive the price of oil, wheat, or copper up and down. That leads to a lot of uncertainty, and a lot of people buying and selling.

But there are a few factors that matter more than the others. Here’s a short list of what the speculators are looking at, and what they mean for commodities in general.

1. Profit-taking from commodity gains

This one is unavoidable. Given that commodities are in an uptrend, every now and then speculators will choose to realise their gains. It will mean tangible assets occasionally take a break from the main uptrend.

2. Gloomy economic news from the US

A global recession would certainly cause demand for commodities to fall somewhat. It’s one reason traders have to sell commodities. We don’t agree that it will kill the boom. But there will be times when some commodity holders lose their nerve and sell.

3. Investors’ continuing need for an inflation shield

Given that the Federal Reserve slashed both headline rates by 75 points less than two weeks ago, there’s still plenty of reason to think people will buy commodities to protect themselves from inflating prices. Low interest rates mean cheaper credit. An easy money supply always leads to inflation in the long term. And you can bet that central banks will continue to heave money at falling financial markets to slow the rot. That’s inflationary.

4. Direction of the US dollar

The US dollar will probably head downwards in the long-term, but at the moment it could move either way. The dollar was so depressed before the Fed cut rates that it actually rebounded. This, we feel, is a temporary break against the norm. And when the dollar moves down, commodities quoted in dollars become more valuable nominally. Traders will buy commodities as a hedge against a falling dollar.

5. All types of market participants are willing to bet on the long-term commodity trend

Not just traders and investors, but consumers of commodities – like Chinese steel mills – will be keen to jump into the market and pile on inventories while piling is cheap. When commodity prices fall, there will be dip-buyers keen to make a thrifty purchase.

Looking at that list, it’s not hard to see why the price of grain futures or an oil ETF could fluctuate. Traders and hedge funds have a lot to think about. Those factors won’t all take precedence at the same time, of course. This adds to commodity volatility.

Predicting exactly when each will be most prominent is impossible. Don’t bother trying. Instead, read on. There are two corners of the resource market that have excellent potential for gains… and speculators haven’t taken advantage of them yet.