May 16 (Bloomberg) -- Not a day goes by without some story somewhere on the housing bubble.

Until recently, the equally effervescent commodities markets drew a pass, escaping the kind of scrutiny usually lavished on markets where prices seem to have separated from the fundamentals.

The surge in the price of metals, both precious and base, is viewed as a fundamental rally, the result of increased global demand for raw materials from developing countries, such as China and India.

It may have started out that way. All bubbles have their own legitimate story. Internet stocks rose into the stratosphere in the late 1990s on the belief that pointing and clicking would produce huge profits even for low-margin businesses in a low- margin medium.

Until yesterday, each new day seemed to produce new or multidecade highs in commodity prices, making it increasingly apparent that the metals had lost their moorings. (Yesterday's plunge was a good reality test.)

Copper prices are up 86 percent since the start of the year; silver, 83 percent, and gold, 31 percent. Even that old can't- know-'til-it-bursts bubblemeister Alan Greenspan would have to admit these markets are showing signs of ``froth.''

Revival Meeting

The gold bugs have come out of their permanent depressive state. Who would have ever dreamed that in this low-inflation world gold would challenge the 1980 highs of $850? (Spot gold set a high of $730.40 last week before falling 4.3 percent yesterday).

The dollar is getting hammered. Stocks and bonds, hearing an inflation alarm emanating from the commodity markets, are nervous.

What if the commodities markets are (whisper it, please) one big bubble waiting to pop? Money chasing returns -- it's the oldest game in the book.

``It all smells of something that will end very badly,'' says Michael Shaoul, chief executive officer of Oscar Gruss & Son.

What began as ``a fundamental story and a trade for smart- money types saw a huge influx of institutional money,'' Shaoul says. Pretty soon, ``financial flows overwhelmed true-user flows.''

Paper Shuffle

How can we determine whether soaring commodity prices are a bubble, defined as prices divorced from the fundamentals? Let's submit the commodities markets circa 2006 to the duck test: If it walks like a duck, quacks like a duck, acts like a duck, it's a duck.

1. Does it walk like a duck?

For starters, consider the rate of commodity price appreciation. ``It's not normal for metals to move up 6 percent a day,'' Shaoul says.

Then there are signs, in the gold market at least, of ``paper shuffling,'' according to Ian McAvity, editor of Ian McAvity's Deliberations on the World Markets, a newsletter based in Toronto.

``The $125 increase in the gold price from November to January saw 135 tonnes go into the vault'' of the gold ETF, or exchange traded fund, McAvity says. ``The next $160 run added less than 3 tonnes. That says a lot of paper trading, but no new money of consequence.''

The waddle is awfully duck-like.

Quackery

2. Does it quack like a duck?

Another sign of the degree to which commodities have separated themselves from reality is the disconnect between home building and copper. Housing data ``used to move the price of copper,'' which makes sense since the homebuilding industry is the marginal buyer of copper, Shaoul says.

Year to date, the Standard & Poor's 500 Homebuilding Index, which includes large builders such as Pulte Home Inc. and D.R. Horton, is down 20 percent while copper prices are up 86 percent. Is China really buying all that copper?

Building construction accounts for more than 40 percent of all copper used in the U.S., according to the Copper Development Association, the development, engineering and information services arm of the copper industry. Residential construction is two-thirds of the construction market, according to the CDA. So you could say that copper's fortunes are intimately connected to those of the housing industry.

Contrarian Signs

While it's true that housing starts have ebbed in the past two months from a three-decade high, every other housing indicator -- from mortgage applications to new and existing home sales to home builders' assessment of the market to unsold inventories of homes -- is pointing to a decline in construction once builders whittle down their order backlog.

Quack, quack.

3. Does it act like a duck?

The fact that after 20 years of going nowhere, commodity investments paid off in the last three to four years is having predictable effects. (Contrarians, take note.)

Calpers, the nation's largest pension fund, is considering allocating 0.5 percent of its $200 billion under management to commodities.

Citigroup Inc., the world's largest financial services company, is doubling its staff at its commodities-trading unit worldwide.

New Product Launch

The silver ETF, launched in April, ``attracted 54 million ounces in its first eight days,'' McAvity says. ``Call me old- fashioned, but Wall Street's history is one of creating new products late in a cycle. The British Post office pension fund bought art and rare stamps in 1980, and a state of Alaska fund bought gold for the first time ever after it topped in 1980.''

Duck-like behavior, to be sure.

Bill Miller, who specializes in beating the S&P 500 as manager of the Legg Mason Value Trust (2005 was the 15th consecutive year of outperforming the S&P), says in his April 2006 letter that he's ``skeptical of the advice to start or increase a position in commodities after the biggest bull move in 50 years.''

He concedes there's a reason to own commodities (if one believes they provide equity-like returns uncorrelated to stocks), and a time to own them (when they're down and trade below the cost of production).

``That time is not now,'' he says.

To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net.

Last Updated: May 16, 2006 00:06 EDT