The prices of oil, gold and a number of other resources have been rising lately, suggesting the balance between inflationists and deflationists is starting to swing in favour of the former.

For example, gold has risen from US$750oz in November to over US$950oz now and oil has almost doubled from US$34bbl in February to US$66bbl. Understanding the complex commodities markets is not easy so I am indebted to US commentator Jeff Nielson who has put together a very good introduction.

One factor influencing commodity prices is relatively straightforward: supply and demand. Just as important, however, is estimated future supply and demand, which investors and users need to factor into current prices.
Since most trading in commodities is speculative in that most owners of futures contracts don't want to take physical delivery, prices can move wildly.

In the case of oil, an additional debate has taken place regarding 'peak oil'. The question here is whether it is even possible to increase future production to meet anticipated demand.

Another consideration is how many units of energy it takes to produce new energy. Extracting oil from marginal areas like Canadian oilsands takes a lot of energy. Then there are biofuels, which some say is an answer to declining oil production. However, 70% of the energy produced from biofuels is consumed in its production.

There are some macro trends that make it highly likely that commodity prices will rise over time. The world's population is growing and many of people are seeing increases in their living standards.

When poor people start to get a little wealthier, they don't simply eat more food, they eat more nutritionally intense food - meaning fewer fruits, vegetables and grains, and more meat and dairy products.

"Since it requires several pounds of grains to produce each pound of meat/dairy products, this means that food consumption increases geometrically (ie at a faster rate than incomes rise).

"At the same time, growing populations are rapidly depleting total arable land through a combination of environmental degradation, and 'consumption' of this land through residential housing. Thus, irrespective of current economic conditions, the future trend is unmistakably toward 'tighter' markets for soft commodities (if not an outright supply crisis) - and much higher prices," he points out.

Mineral resources also face issues with rising demand and much higher production costs, because the most economical mineral deposits have already been depleted. Thus, if prices do not rise steadily to stimulate further exploration and development of new sources for these commodities, the result will be an inevitable supply crunch.

He also notes that another driver of commodities prices are changes in the money supply. "If an economy has 10 units of commodities, and $10 of currency in circulation, then if we assume full consumption, we should expect a price of $1 per commodity unit. But if we print more money, so that there is now $100 in circulation, then full consumption implies a unit commodity price of $10."

What we have seen this decade is the rate of increase in the global money supply steadily rising, until the "credit crunch" began - and then a much more rapid rate of increase since that point in time. As a result, he believes all those extra dollars eventually will drive up the price of commodities.

Another way of looking at this scenario is that the value of paper dollars will fall relative to real assets such as more scarce resources.