The commodities markets have been an avenue for speculative impulses for centuries. We tend to forget this in light of the media coverage lavished on the stock market, and to a much lesser extent the bond market. The commodity markets also differ in that those who have traded them successfully have done so from both the long and short sides. Only recently has the idea of diversifying via long-only, passive commodity investments become popular.

It appears that some hedge funds are taking some money off the table due to the huge run in commodity prices. Gregory Zuckerman in the Wall Street Journal reports that the open, long speculative positions in various commodity futures has waned.

"A lot of macro hedge funds have taken a lot of the profit and risk off the table in these markets, and some have shorted commodities," says David Smith, chief investment officer at London-based GAM, referring to those funds that make bets — particularly bets on a price decline — on global trends. GAM invests about $23 billion in hedge funds. "The buying has gone from hedge funds to individuals and others" in the past year, he says.

In light of this someone has been taking their place. The usual suspects include those who have bought into the longer term case for commodity diversification.

So if hedge funds are playing a smaller role in the market than many assume, who is playing a bigger part in the surge in many commodity prices? Institutional investors, such as endowments and pension plans, continue to increase their allocation to commodities, helping to push up prices. These investors are seen as more long-term-oriented than hedge funds, which could help keep any commodity weakness from turning into an outright selloff, some traders say.

These investors could very well turn out to be right. Randall W. Forsyth at Barron's has a piece detailing the thoughts of the new head of Harvard University's endowment, Mohammed El-Erian. In it he finds a number of anomalies that underlie a "global conundrum." One of which is the move in commodity prices.

According to El-Erian a synchronized global expansion that includes emerging powerhouses China and India has re-set demand patterns for commodities.

The veteran manager likened the demand for commodities to the textbook framework describing the demand to hold cash. First, there's a transaction demand, that is, to use it. In the case of China and India, which are growing rapidly but are very inefficient users of energy, that's resulted in a major shift in the demand curve. Then, there's precautionary demand, like an extra $20 in case you have to catch a cab, or the strategic reserves being built by India and China. Finally, there's the speculative element, has helped many of these markets make their near-vertical moves recently.

The transaction and precautionary demand for commodities is high, but not high and volatile. Speculative demand is by definition volatile, and clearly took a hit in Monday's selloff. But prices steadied Tuesday showing that, while traders may not have been buying dips yesterday, there wasn't any follow-through selling. If it were really a bubble, you'd expect more than a one-day dip.

We can only tell in retrospect whether this move in commodity prices is a speculative bubble inflated by passive, long-only demand or whether it is a rational reflection of a changed world order. While the case for long-only demand may have been oversold as a panacea it has turned out (over the past couple of years) to have been a godsend to early investors. Not unlike the actions of some global macro funds, for those early investors a regular rebalancing program would have called for a reduction in commodity exposure back to target, not an increase.

For those interested in learning more about commodity indices, Tom Coyne at the ETF Investor has a nice piece up that compares and contrasts the differences among four major investable commodity indices.