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

The rumor going around this morning, is that the banks are all right on the night, and not in major deep dookie any longer. Hmmmm… Didn’t I tell you over a week ago that this was going to be the case? I said it because… I just don’t believe the Gov’t is going to “spook” the markets right now and release the “real results”… Of course I don’t know that to be a fact, it’s just my hunch. I could be all wet… But, at least I got the first part correct, if in fact the results print as rumored…

But then, Bloomberg printed a story last night that showed a handful of banks needing between $34 Billion and $2 Billion in additional capital… So… Let’s see which set of books the Gov’t reveals, eh?

OK… So the currencies all sold off on the news yesterday morning that the banks would need more capital, and then came back overnight on the latest rumor… As I said yesterday, the markets are all about the stress tests right now… Actually, I’m surprised the Gov’t didn’t delay them one more day so that the focus would be on the stress tests tomorrow, instead of the Jobs Jamboree!

Speaking of the Jobs Jamboree that will take place tomorrow… The ADP Challenger report printed yesterday and indicated that tomorrow’s Jobs data will show less jobs lost, and a number below 600K for the first time in 5 months! ADP says the jobs lost were 491K… And believe me now and hear me later on this, the media will eat this up, and be all ecstatic about the fall from 600K to 491K… As if… 491K is a “good number”! Well, yes, it’s better than 600K… But the reporting should all be balanced… Like… “Is this the turning point in job losses? Yes, their still almost 500,000 for the month, but that’s a fall of over 100,000. While one monthly report does not make a trend, just like one swallow doesn’t make a summer, this is good news, and we’ll be watching for signs of further improvement in May.”

I’m watching the Big Dog, euro, rally right now, from an overnight low of 1.3250, to its current level of 1.3330… As German March Manufacturing Orders surprised this morning with a rise of 3.3% in March. The European Central Bank (ECB) is meeting right now, and is expected to cut rates 25 BPS to 1.25%… I read a couple of stories yesterday regarding the ECB… The writers were saying how the Eurozone economy is in shambles and needs a larger than 25 BPS rate cut… But, I argue with that… The ECB wants to keep some rate cut arrows in their quiver, in case they need more rate cut stimulus in the coming months… They shouldn’t shoot them all now! That’s what the Fed did, and we know what that led to… Quantitative Easing!

But the Big Winner of yesterday and last night is the Aussie dollar (A$)… It’s on a moon shot, since the Reserve Bank of Australia (RBA) left rates unchanged the night before, and issued a balanced statement afterward, with emphasis on waiting to see the affects of the previous rate cuts. The A$ got an additional boost this morning when it was reported that the unemployment rate in Australia fell for the first time in 8 months! The A$ is 75-cents and change this morning, heading to 76-cents… A 7-month high!

Some commodities have been rising in price recently… I’ve chronicled the rise in the Oil price, but here’s one you don’t hear about every day, except of course if you listen to our friend, Jim Rogers, every day! I can hear Jim Rogers talking about sugar as if he’s sitting right here next to me… Sugar is heading to a 28-year high, as the crop in India fell short of expectations… And Wheat had gained 3 consecutive days now, on low yield estimates for the U.S. crop… I hear you Jim!

I would think that if the bank stress tests “somehow” show no insolvency risk, that risk taking will be back on the table, BIG TIME! So… I would think that if risk taking is back on the table, Gold, currencies and other commodities will be singing a different tune… A tune of Happy days are here again, The skies above are clear again, So let’s sing a song of cheer again, Happy days are here again… OK, admit it, you after singing along with this, you had a vision of Bugs Bunny dancing with a cane singing the song! HA!

Speaking of India… Yesterday, I told you about how the currency was rallying, and how my Currency Capitalist colleague, Ashish Advani, gave the currency the thumbs up in last month’s letter, and how Standard Chartered Plc was now bullish on rupees… Well, now add Society General (SOCGEN) to the list of rupee flag wavers! SOCGEN believes the rate cuts in India are a thing of the past, and it will be all seashells and balloons for the rupee going forward…

And while I’m talking about an Asian currency… I might as well head over to China and talk about how their stimulus continues to hit the nail on the head, and help to bring China’s economy out of their slowdown and doldrums. The Peoples Bank of China (PBOC) issued a report yesterday saying that the economy performed “better than expected” in the 1st QTR. This improved performance is helping the “managed currency” (renminbi) to gain ground VS the dollar once more…

I had a reporter follow up with me yesterday on my thoughts toward what China had on their minds… The reported asked me if I thought the Chinese would be under more pressure to allow the renminbi to float, if they are really pursuing a “wider use of the renminbi”… I said… I thought the Chinese would receive pressure to allow the renminbi to float, but no more than what they received in the past from the combo of Paulson, Schumer and Graham… (the U.S.!)

The Bank of England (BOE) is also meeting this morning to discuss rates… I would think it is almost inevitable that the BOE would leave rates unchanged… This has been the prevalent thought in the markets for a week now, and has led to the pound sterling making a very auspicious rally to 1.5170! What I think the BOE needs to do now, is to sit down with the markets and tell them what direction their Quantitative Easing (QE) is going… Will they limit the purchases, or increase them, etc… Not that any QE is good, but to be honest and transparent with the markets would be a step in the right direction for a central bank!

Yesterday, Norway’s Norges Bank lowered their internal rate 50 BPS to and internal rate of 1.5%. I was hoping they would only cut 25 BPS, but… This has all the makings of “the last rate cut”… You know, one big blow out to end the summer… Or… A star burns brightest right before it burns out… But, I now believe this will be the last cut in Norway…

Recall many moons ago I called this a “race to zero” regarding Central Banks around the world cutting interest rates? Well… It certainly has panned out that way, eh?

Have you ever heard of the book, “Black Swan”? The author Nassim Nicholas Taleb describes his theory of “Black Swan” as a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations. Obviously we’ve had a few “Black Swans” in the past 2 years, eh? Any way, the thing I’m going for here is Mr. Taleb was speaking at a conference yesterday, and had this to say about commodities and Gold… “The global economy is heading into a big deflation though the risks of inflation are increasing as governments print more money. Gold and copper may rally massively as a result.”

Speaking of Gold… It has rallied the past two days, but could be just waiting in the wings for confirmation of two things… 1. the bank stress tests don’t show major problems… And 2. the Jobs Jamboree does show falling job losses… Silver has really gotten on the rally tracks too, outperforming Gold the past two days! Silver is back above $14… And that’s good news… That is unless you’ve dilly dallied your days away, and not taken advantage of the cheaper prices that have been available for some time now!

Hey! Remember last year, when I was involved in the Sovereign Society’s FX University and the Currency Tours? Well… We’re not going to go city to city this year… Instead, we’ll hold an FX University Currency Seminar for 3 days in Scottsdale AZ in Sept! So, if you missed the traveling troupe last year, we’ll be doing it even bigger and better this year! Mark your calendars for Sept. 24-27. You can find out more by visiting www.sovereignsociety.com

No word from the BOE or ECB, so I’ll just head to the Big Finish now… No wait! The BOE’s decision just flashed across the screens… Let’s see here… Oh, the BOE left rates unchanged (as expected, see above), and the announced that they will increase the size of their asset purchase program (Quantitative Easing) by 50 Billion sterling to 125 Billion sterling… Well… Let’s see here, the pound sterling is taking on some water after this announcement, as it should! Too bad for the sterling rally… But increasing QE is not healthy for a currency!

The ECB decision will come in about 45 minutes… I’ll be well on my way to figuring out my currency positions and trades needed by then… So, I’ll just go to the Big Finish now, for real this time!

Currencies today 5/7/09: A$ .7565, kiwi .5935, C$ .8575, euro 1.3330, sterling 1.5085, Swiss .88, rand 8.3440, krone 6.4875, SEK 7.8525, forint 208.75, zloty 3.2325, koruna 19.9250, yen 99.20, sing 1.4675, HKD 7.75, INR 49.27, China 6.8215, pesos 13, BRL 2.1130, dollar index 84, Oil $57.91, Silver $14.11, and Gold… $921.30

Source: It’s All About The Stress Test

It’s no secret that China has largely been responsible for the commodity run-up of the past few years. Now the question remains if the latest deal with Cuba could give China a new lost-cost provider of commodities. If so, it could be a bit of bad news for investors looking for a China-driven commodities run-up.

On Tuesday, Chinese president arrived in Cuba as part of a Latin American tour to strengthen ties with the resource-rich region. And his timing was impeccable.

Just weeks after Cuba’s farm sector and overall economy were rocked by three hurricanes which inflicted more than $10 billion, China parachuted in with almost a dozen trade agreements, according to Cuba’s state-run news agency.

In exchange for wider access to Cuba’s natural resources, China will rehabilitate the country’s decrepit infrastructure.

High on China’s Cuban shopping list were nickel, sugar and other agricultural products. By going direct, China is able to bypass the public markets whose fortunes have been riding on its voracious appetite for commodities.

As it now stands, China is Cuba’s second-largest trading partner, with both sides generating $2.7 billion annually – only about 3% of China’s overall trade with Latin America last year. This ranks China as second, after Venezuela, whose trade with Cuba was pegged at $7 billion.

While it may be easy to pooh-pooh Cuba’s contribution as minor, the fact is the Castro brothers are sitting on a bounty of nickel, tobacco, sugar, offshore oil, iron ore and copper. And most of it could conceivably head straight into China, deflecting potential gains from the open markets.

Earlier this month, when China said it would spend an estimated $586 billion over the next two years on a massive national infrastructure build-out, the commodity bulls roared out of the gates – expecting this new initiative to give prices a boost.

At the time, we wrote that the impact of the China plan would be minimal on commodity prices – and now with the Cuban deal we’re sticking to our guns.

But if anyone really wants to know what China’s plans for Cuba really are, just look to Macau.

Dow Jones reports, “Rapid increases in high-fructose corn syrup prices will encourage a return to sugar usage in U.S. soft drinks and foods — a move that’s already gathering steam among consumers — sugar industry members predict.” Granted, you’d expect that line from the sugar industry, but the fact remains the cost of HFCS is coming into line with that of good old-fashioned sugar.

HFCS has become a staple of the American diet over the last 25 years. After sugar prices peaked in the early 80s, soft-drink makers switched to HFCS, and now the goop is used in everything from ketchup to salad dressing to fruit yogurt.

The problem is the way the human body handles HFCS, according to many nutritionists. As the San Francisco Chronicle explained the theory a few years ago, “The body processes the fructose in high fructose corn syrup differently than it does old-fashioned cane or beet sugar, which in turn alters the way metabolic-regulating hormones function. It also forces the liver to kick more fat out into the bloodstream. The end result is that our bodies are essentially tricked into wanting to eat more and at the same time, we are storing more fat.”

For this, we can lay blame at the feet of the sugar industry, whose lobby has forever convinced Washington to limit sugar imports — which as I noted on Monday, forces Americans to pay twice as much for sugar as the rest of the world. HFCS might have never come into the picture had it not been for government interference.

I have an idea: What if we end the subsidies for corn ethanol to help bring down the corn price, and end the import limits on sugar to help bring down the sugar price?

Hey, a guy can dream, can’t he?