Commodity prices have been on a wild ride over the past couple of years. They surged to dizzying heights as oil hit $147, and then crashed down to Earth as the global recession crushed demand. Now they seem to be soaring again as optimism for a global economic recovery has engulfed investors. Take crude oil for instance. Texas Tea has almost doubled since the start of the year after crashing over $110 per barrel from its highs. Gold is pushing $1000 per ounce again. The question is can it last?

Before answering that question, it would help to find out what is behind the recent spike. There are actually a confluence of factors that are creating a wall for commodities to climb up. A big reason is the U.S. dollar plunging anew. Commodities are denominated in dollars, so when the greenback falls, commodity prices will rise all else being equal. The dollar is being battered by our ballooning deficit and the fact that so much new money is being created. The Fed's balance sheet has tripled lately. With spending projected to explode off the charts, the dollar could be under pressure for a long time to come.

China is another huge factor. The world recession took a sizable bite out of its growth, but the trajectory is certainly moving back up. China has passed successful stimulus packages which seem to be stoking their growth and thus their thirst for oil once again. Recent data has shown that Chinese oil demand rose 4% in April, which was the first yearly gain in six months. Earlier this week, a Purchasing Managers Report out of China showed that industrial output gained for a third straight month. It came in at 53.1, which was above the 50-level that is the boundary between growth/contraction. Remember how much China was involved in the initial runup to $147 for crude oil? Crude oil could have further to go if more data show the Chinese economy gaining momentum.

One index to watch to get a sense of the commodity group as a whole is the Baltic Dry Index. This is an index that tracks the cost for bulk such as iron, ore, coal, grains, and fertilizer traveling by sea. It is a good guage on the demand for these commodities. The index has been consistently hitting new highs for the year which is certainly notable. It stands just shy of 3500, well above its lows of 666, but also way down from its highs of around 12000. Keep an eye on this index as it has been a leading indicator of how commodity prices behave in the past. It is signaling further appreciation now.

So how to act on higher commodity prices? The obvious answer is to buy stocks that are tied to the price of commodities. I like several oil service stocks such as Schlumberger, Halliburton, and Transocean here. They have all risen, but I believe they have more upside as the big oil majors start to invest more in production as oil prices rise again. In my opinion, this group has the most visible earnings stream going forward.