`Commodity bubble may burst by year-end`

Investments in commodity indices that balloonned to $235 billion in mid-April from about $70 billion at the beginning of 2006 has "many of the essential ingredients of a classic asset bubble'', New York-based Lehman analyst Edward Morse said in a report today. "Markets may face a sharp correction.''

The UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials has jumped 22 per cent this year, reaching a record on February 29, as raw materials including oil, gold, corn and wheat reached their highest prices ever.

The gauge has climbed every year since 2001 as global growth boosted demand for food, energy and industrial materials. Investors have increased commodity holdings in 2008 as a weaker dollar spurred demand for an inflation hedge.

Commodity prices may start to drop around the year-end as "uncertainty about the physical state of the supply-demand balance clears,'' Morse said.

Until then, "the temporary self-sustaining nature of financial inflows means the bull run in commodities has potentially more to go'', he said. Oil, which reached a record $127.82 a barrel on Friday in New York, may reach $200 before falling, Morse said.