Commodities have been the best performing asset class since the Fed announced QE2 last August. Even after the fall of 10 per cent seen this month, commodity prices are still 29 per cent higher than they were when Mr Bernanke spoke at Jackson Hole on QE2. But this has started to slow the growth rate of the world economy, raising doubts about the sustainability of the rally in all risk assets. So where are commodity prices headed next?

Commodities are very volatile investments, which may be appropriate only for professional investors. Like all other asset classes, timing is what matters most. In this article, which appears in today’s FT, I outline three factors which are supportive of commodity investments in the period ahead. First, this is the stage of the economic cycle when commodities normally out-perform. Second, the shape of the futures curve in many commodities has shifted recently towards backwardation, which is normally good for total returns in the asset class. And, third, the introduction of commodities into a standard portfolio of equities and bonds is likely to bring diversification benefits, even though these have not been apparent in recent years. The main risk to the bullish case is that China may slow more rapidly than is generally assumed, under the impact of tighter monetary policy.