Where are the $200-a-barrel oil guys? What about the $1,000-an-ounce gold bugs? How could commodities — Wall Street’s favorite play over the last several weeks — turn around so dramatically?

On Monday, gold futures fell to their lowest point this year, off $36 an ounce to hit $824 an at their nadir. Gold prices are down 20% from the high of $1,034 an ounce set March 17. The Standard & Poor’s GSCI index of 24 future prices is down 22% from its record, set on July 3. Prices for all kinds of commodities are falling, even agricultural goods, while silver, palladium, and platinum “are all getting hammered,” Edward Meir, a senior commodities analyst for MF Global, the world’s top broker of exchange-traded futures and options, says. Dubbing the sell-off “a reality check,” Mr. Meir says that commodities “were way overdone, just like Internet stocks,” and that “people are realizing that supply and demand are not that tight.”

Some observers cite a firmer dollar and weak oil prices as the cause of the collapse, but that reasoning seems somewhat circular — as in, commodities are down because commodities are down.

In truth, commodity prices are falling because the fundamental underpinnings have changed. At the same time that economies around the globe are slowing, producers of commodities have responded to high prices by ramping up production. Mr. Meir says that the new supply of metals really won’t hit the market until 2009 or, in some cases, 2010. And as analysts begin to discount the new production coming on line, conviction about ever-rising prices is evaporating.

Even now, Mr. Meir says that increased output has pushed inventories higher. “They are still tight, but more comfortable.” Copper stocks on the London Metals Exchange, for example, have increased by 50% over the past six months, while nickel, which was at a very low level, has risen five-fold this year, and zinc stocks are at a three-year high, Mr. Meir says.

Robert Garino, who tracks commodities for the Institute of Scrap Recycling Industries, weighs the possibility of increased supply somewhat more skeptically than Mr. Meir.

Mr. Garino thinks the run-up in prices in recent years reflects basic supply and demand, citing the well-documented impact of emerging country growth. “There’s a strong argument that this is not a commodities bubble, but that it has been based on real consumption drivers.” Up until now, according to Mr. Garino, “where people have tended to go wrong is overestimating supply. In 2007 to 2008, supplies failed to meet expectations because of strikes and setbacks and a whole dog’s breakfast of factors. Going forward, people still overestimate supply.”

Mr. Garino says we may be in the seventh year of a 10-year commodities cycle, although we could also be in a super-cycle, which may last 15 years.

He may be right, but there’s no denying that ramped-up capital investment by producers of copper, lead, gold, and zinc, to name a few, is generating increased output. Take Freeport McMoran, the world’s largest publicly-traded copper company. Responding to higher prices and income, the company increased its exploration and capital spending; capital outlays this year are expected to total $2.4 billion, compared to $1.8 billion a year ago. Exploration spending will come in around $175 million this year, versus $119 million a year ago. Today, the company has 80 drilling rigs operating, up from 26 in March of last year.

The impact of this re-energized capital spending program is that copper sales (on a pro forma basis, including the acquisition of Phelps Dodge), are expected to total 4.2 billion pounds this year, compared with 3.9 billion last year. Over the next two years, sales are expected to total 4.5 and 4.8 billion pounds, respectively. In other words, output in 2010 will be fully one-third above 2006 levels. If Freeport can be viewed as a proxy for the industry, such gains will likely go a long way towards meeting even the most optimistic demand projections.

Along the same lines, the most recent report by the Lead and Zinc Study Group, published in July, said that global output of lead rose 8.4% over the first five months of this year compared to last year. The rise in refined metal production was 3.9%, while consumption only increased 3.2%. Global zinc output similarly increased 9.2% through May, while demand for refined zinc was up only 1% compared to a rise in supply of 1.8%.

The point is that rising prices provide a powerful incentive to expand production. (This reality shows up in agricultural products too, of course. The USDA announced yesterday that the corn crop this year will likely be the second largest in history, and the soybean crop will be the fourth largest.) Some indication of the impact can be gleaned from Freeport’s assessment of their recoverable reserves of copper: At $1.20 a pound, recoverable reserves are estimated at 93 billion pounds; at $1.50, the figure jumps to 100 billion pounds.

On the demand front, Mr. Meir says that traders were underestimating the impact of a weakening American economy. “The notion that the U.S. economy is not that important has gone out the window,” he says. “China is still an export-driven economy. The U.S. slowdown is impacting China, and spreading even further afield.” Still, the air has gone out of the commodities balloon at dizzying speed. “The funds are like lemmings” says Mr. Meir. “They’ve just all been piling in, and now they are piling out.”

There is no doubt that the flow of institutional money into the commodities sector accounts for some of the rise in prices over the past two or three years. As pension funds and endowments began allocating portions of their billions into rice and palladium, seeking diversification and returns, there were more buyers than sellers. The proliferation of exchange-traded funds investing in the sector skyrocketed, cranking up demand for commodities and futures even further. Investors, rather than industrial users, accounted for a rising share of the marketplace and propped up prices. At the end of the day, there is only so much copper available.

What should investors do now? Though he thinks commodities should be part of people’s portfolios, Mr. Meir would not recommend buying any commodities in the near term. He thinks the downdraft will continue over the next few weeks, at which point most commodities prices will find a bottom, and then establish a trading range.

“Prices are not going to collapse,” says Mr. Meir. “Crude will probably fall to $95 to $100 per barrel, and then trade between $100 and $130. Copper could fall another 10%, and then move sideways.”

Surely some commodities have brighter prospects than others? “I wouldn’t touch any now. They are all so synchronized it will be hard for one to pop out and do well.”

peek10021@aol.com