When both base and precious metals took a tumble in May, skeptics of the whole bull market felt confirmed in their view that a lot of the price action was purely down to speculators in the futures and options markets driving the price beyond rational measure.

As an example, copper hit a high of $3.90 per pound to then drops 26% but is now 8% off that high. Likewise, gold dropped 26% and is now 13% off that high. Good old volatile silver was down 38% and is now 13% off that May high as well.

However, re-establishing its bullish credentials was nickel, which dropped about 22% but has since raced past its old highs of $10.30 per pound to establish a new high of $12.20.

Now bearish commentators may cite nickel as being in a real supply deficit, but they are quite happy to still assign momentum trading by hedge funds and others as a large part of the entire bull market in metals as well as commodities in general. And when it comes to speculation, trading on margin without ever having to take delivery of any metal contract is seen as a vehicle to grossly inflate an asset price.

I won't attempt to dispute the inflationary effect that leveraged instruments such as derivatives can have on their underlying asset. What I will dispute is the large premium that commentators assign to them and to prove it I will turn to the iridium market.

What is iridium you ask? It is a member of the platinum group of metals alongside palladium, platinum, ruthenium, rhodium and osmium. It is a very hard but brittle metal making it hard to work with but it is also the most corrosion-resistant metal know to man. Applications of iridium range from tipping fountain pen nibs to making devices that are required to withstand high temperatures. Only about three tones of this substance are mined each year mainly as a by-product of nickel. The current price is $400 per troy ounce.

Now the main point is that iridium is not traded on the futures and options markets. The main refiners such as Engelhard and Johnson-Matthey set a base price to which dealers then add their bid-ask spread produce it. Distributors then sell it on in powder, foil, wire or tube form to industry.

In that respect, it is difficult for an investor to take possession of this metal for speculative purposes. They can't pay a small amount to lay claim to a 400-ounce contract or anything like that. They basically have to buy it wholesale cash up front and also come up against an industry that may not take kindly to new fangled interlopers. However, if you really want to buy this stuff, the determined investor will find a way. In fact, you can buy iridium by the gram on eBay and will cost you $653 per troy ounce or 63% over spot.

So this metal cannot be said to be the plaything of hedge funds or even small speculators. In that light, how has its price performed in this metals bull market? Has it failed to live with its big brothers, Platinum and Palladium, which enjoy derivative status? Not at all! Here is the price comparison chart for iridium and platinum over the last 6 years.

As you can see, in the time frame of January 2000 to July 2006, platinum increased in price by a factor of 2 while iridium saw no net gain. I would suggest and suspect that iridium may have been influenced by the palladium bull surge of 1997-2000, which explained its price collapse from $425 to $90, but I cannot be sure of that.

However, if we compare the two from 2001 onwards when the bull market began to wake up, we see full participation in the boom by iridium. From individual lows in mid-2001, platinum advanced 116% while iridium flew from $100 to $400 or a 300% gain. This is a gain comparable to the moves seen in silver, copper and so on. One may even note the correlation in dips as both metals took a rest in mid-2002 before taking off again early 2003.

No doubt about it, in the absence of leveraged paper contracts, iridium proves that the gains seen in the metals market are real and can only be partly explained by speculative interests.

So where does iridium stand today as our bellwether of real commodity demand pricing? The answer is flat as a pancake. The price has stayed fixed at $400 since the time other metals took a dive. This however raises a question. Why has iridium flatlined while other metals have dropped something like 25% during that time?

The answer lies not in derivatives adding a huge price premium across the entire six year bull market but rather because they add a short-term volatility premium at points of consolidation. In the same two month period in which iridium has seen a zero percent price change, copper is now only at an 8% drop, nickel an 18% gain and gold a 13% drop. I fully expect to see gold and copper catch up with iridium and see their own zero percent change crossover as they go onto make new highs like nickel.

Another interesting point in this regard is rhodium. Similar small platinum group metals such as iridium, ruthenium and osmium have flatlined since the drop in general metal prices. However, rhodium experienced a 34% drop and has so far rallied to 26% off its $6300 high. Why might this be despite it not having a futures or options market? I suggest it is because it is more accessible to investors through metal pool accounts run by bullion dealers and will therefore carry a greater speculative premium. However, this rhodium correction has to be seen in the light of a stupendous move from $450 in 2003 to a high of $6300 in less than three years. Obviously, rhodium was the place to be for those seeking maximal gain from the current metals bull market without the leveraged risk of the futures market.

In conclusion, the metals bull market is far from dead. Demand is real as China and other countries rapidly industrialize and invite their citizens to participate in this new prosperity. Investors and speculators have indeed jumped on the bandwagon but the prime driver continues to be increasing demand and tightening supplies.

Roland Watson writes the investment newsletter The New Era Investor that can be purchased for an annual subscription of $99. To view a sample copy of the New Era Investor newsletter, please go to www.newerainvestor.com and click on the "View Sample Issue Here" link to the right.

Comments are invited by emailing the author at newerainvestor@yahoo.co.uk.