COMMODITY markets have had a pretty good run so far - gold hit a record US$1,070.40 per ounce over a week ago, while oil crossed US$80 a barrel last Wednesday.

Similar rallies were also seen in silver and the industrial metal copper.

Clearly, the US dollar weakness has a role to play in this as investors rebalance their portfolios to hedge against the American currency.

But beyond that, the good news is the rally could be an indicator of an economic upswing in the months ahead.

This is especially so for copper - an important industrial metal, as it has historically been a leading indicator of economic activity.

On the structural front, commodities have broadly benefited from an apparent strategy by countries such as China to diversify their reserves base by building commodity inventories. Specifically, China recently announced an increase in gold holdings.

In the longer term, others pointed out, commodity prices will see a rebound as the factors that drove them to pre-recession spikes are still intact.

For example, rapid growth of the middle class in emerging markets means that spending on cellphones, consumer electronics and vehicles will continue to be strong, Harold Sirkin and James Hermeling of Boston Consulting wrote in a report.

Prior to the downturn, purchases of tractors by India's 306 million farmers were increasing at 20 per cent per year. Such purchases push up demand for steel, rubber, fuel, seed and fertiliser, they said.

Plus, rural-urban migration will prompt further investment in housing, roads, railways and other infrastructure projects.

Merrill Lynch estimated last year that the developing economies would invest some US$2.25 trillion annually over the next three years to meet their infrastructure needs.

While the recession may slow investment in some countries, China has responded to the slowdown by increasing its planned infrastructure spending.

The East Asian giant lacks the raw materials it needs to produce steel, and this has turned it into the world's largest importer of iron ore. It has been accounting for 40 per cent or more of the international iron-ore trade in recent years.

Indeed, some point out that the current expansionary policy being undertaken by central banks and governments around the world may well lead to an inflationary environment which will have a positive effect on commodity markets.

Furthermore, the key fundamental components of increasing long-term demand and insufficient supply that have been driving commodity prices higher since 2001 remain firmly in place.