Throwing resources at raw materials

When the dot-com mania of the late 1990s ended in ruin, many burned investors vowed, "I'll never do that again."

Which is one reason the boom in prices of oil, gold, wheat and other commodities in this decade -- and particularly in the first quarter of this year -- has been viewed with plenty of suspicion.

You've seen this movie before, you figure.

But as the first quarter ends, it's going to be tough for people to look away from the gains that commodity-related investments racked up.

One of the most popular mutual funds designed to track commodity prices, the Pimco Commodity RealReturn Strategy fund, is up 16% year to date. By contrast, the Standard & Poor's 500 stock index is down about 10%, including dividends.

By now, most everyone knows the basic story behind the commodity bull market. The strongest global economic growth in three decades has fueled robust demand for real stuff: oil to power cars; iron to build bridges, dams and skyscrapers; and grain to feed hundreds of millions of wealthier consumers, especially in the developing world.

The Reuters/Jefferies CRB index, which measures the price of a basket of 19 commodities, has risen 107% since the end of 2001.

The S&P 500 index is up 14% in the same period. Throw in dividends and the return is about 28%.

So stuff has done a lot better than stocks, generally.

And therein lies the dilemma for many investors: Could it be too late to buy into commodities?

It's always hard to know where a bull market powered by fundamentals ends and a bubble begins. Yet the action in many commodities over the last 15 months has felt bubbly enough.

Wheat, for example, went from $5.01 a bushel at the beginning of 2007 to (briefly) more than $12 this month before pulling back. The price ended Friday at $9.90 a bushel in Chicago futures trading.

All investing ultimately is about supply and demand, of course. But when you're investing in a company, you're also betting on a management team. A bond is a bet that interest and principal payments will be made.

With raw materials, it's nearly all about supply and demand -- demand not just from actual users of the stuff, but from hot-money speculators as well.

The biggest risk facing commodities now may be the health of the global economy. If the rest of the world is about to follow the U.S. into a sharp slowdown or worse, prices of raw materials could crumble in the near term, in part because hot money could flee.