Montreal, Canada

The Reuters-CRB Index, one of the most widely followed commodities benchmarks, is now just 2.3% from its 2010 high after posting big gains in July and September.

During a volatile 3rd quarter that saw stocks and bonds rally, the CRB Index surged 11% and has broken above its 50-day and 200-day moving averages – a bullish signal.

The CRB, which includes 19 raw materials, remains 39% below its all-time high in 2008 at 473.97. The index is up 1.2% in 2010 and has gained more than 12% over the last 12 months – besting the S&P 500 Index and the MSCI World Index.

Commodities, which hit a low point this year in May, track the inverse performance of the U.S. dollar and act as a hedge against fiat paper and inflation.

As the dollar continues to decline, I suspect most commodities will hit new nominal and inflation-adjusted highs. Supplies remain tight for a handful of raw materials, especially in the industrial metals, precious metals and, increasingly, the agricultural sector. Even live cattle and lean hogs are thinning as supplies shrink.

The U.S. Dollar Index, which holds more than 55% of its weighting in EUR, peaked at the same time raw materials began a recovery last summer; low interest rates and strong emerging markets economic growth have propelled the index higher recently. This story is far from over. The CRB Index is likely to outpace bonds over the next few years as rates begin to rise and inflation accelerates. The “bubble” phase of the commodities bull market is about to begin.