Jeffrey Christian is one of the most established names in the commodities industry. The founder of CPM Group, a fundamentally focused commodities research and asset management firm, Christian is also author of "Commodities Rising," a 2006 book examining the long-term outlook for commodities.

Before founding CPM Group, Christian was head of commodities research at J. Aron & Company, which was acquired by Goldman Sachs. He spoke with the editors of HardAssetsInvestor.com about recent trends in the commodities market and how investors should be positioning their portfolios today.

HardAssetsInvestor.com (HAI): Let's get right to the point, Jeff. The commodities markets and commodities pricing has been crazy recently. Just look at oil, moving from $50/barrel to $140/barrel and back to $50/barrel again. What is going on?

Jeffrey Christian, founder, CPM Group (Christian): Basically what you're seeing right now is a massive liquidation of assets across all asset classes. You're seeing institutional investors and proprietary trading desks liquidate their leveraged investment positions, at any price.

They've been doing it for a couple of reasons: 1) prices are falling; 2) credit lines are either being pulled back or completely taken away. In many cases, these investors have no choice but to liquidate their positions.

The size of the paper markets for currency and commodity futures is huge. If you look at gold, silver and currencies, the ratio of underlying assets to derivatives is 100-to-1. In commodities, it's probably 40-to-1. So you have all these paper assets being sold back into the market.

Basically, everybody's running for the exits at once. That's what's causing prices to fall.

HAI: How far along are we in this process?

Christian: There's no way of knowing for sure. If you look at gold and silver, there has been unprecedented demand for small gold and silver products at the same time that these leveraged positions are being liquidated. You've seen very little liquidation on the COMEX. A lot of the liquidations are taking place in over-the-counter products, which makes sense, as that is where the leveraged money was operating.

But there is no visibility into the over-the-counter market. There are simply no numbers. You don't know how much there was at the start of the liquidation, and you don't know what's left. The sense is that we're pretty close to the end of the de-leveraging process, but we're not quite there yet.

HAI: What happens when we do get to the end of de-leveraging?

Christian: At the end of the de-leveraging, you will see a divergence between gold and silver on the one hand and industrial commodities on the other. Even today we have this very strong demand for physical gold and silver globally, from India to the Middle East to America. Once the de-leveraging ends, I think gold and silver prices could spike sharply higher, possibly as early as late November or early December.

The industrial metals, on the other hand, might start building a base. I think they may move up from where they are today, but it could take a while. People will look at them through the lens of the recession, and they will assume demand for industrial metals will be less forthcoming.

HAI: Has the collapse in commodity prices scared off some of the new entrants in the commodity space? And won't that dampen any recovery?

Christian: What we've found is that there have been very few commodity funds that have simply closed and left the commodity space. The vast majority of fund companies are simply moving to cash. That's important because when the prices bottom out, these guys will start investing again, and prices will rise because of their reinvestment patterns.

HAI: What about the large pension funds and institutions, many of whom just got into commodities right near the peak? Will they stay the course, or will they pull up stakes and go home?

Christian: I think some will be scared off but the vast majority will stay. They will be chastened, and for at least the next 12 months, they will remember that the market can go both up and down. But they will still be there.

You saw a similar trend after the Tech bubble. People got in near the high and lost a lot of money, and they were scared off and didn't invest in Technology for a while. But eventually they came back in, albeit in a more chastened and rigorous fashion.

We're actually excited that this might mean more interest in the kind of fundamental analysis CPM provides. We think some of the people who rushed into the market and bought long-only indexes and such will say, "I'm still interested in commodities, but I want to do it more intelligently now." They might want to do a long/short approach more grounded in both macroeconomic analysis and microeconomic analysis of what's driving individual commodities.

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