NEW YORK ( TheStreet) -- Commodities had a blistering rally in 2010, on the back of global supply shortages, strong demand from China and a weak dollar.
The rally in the second half of 2010 was particularly strong, as further quantitative easing from the Federal Reserve sparked inflation fears and drove investors to add commodities to their portfolio.
Still, Barclays Capital notes that the recent commodities rally isn't due entirely to the weak dollar. The Dow Jones-UBS Commodity Index, adjusted for the trade weighted value of the dollar, is still up 13% since June.
Market experts from Jim Rogers to Marc Faber have been arguing that we are in the middle of a multi-year boom in commodities, as demand from China and India grow to unprecedented levels for everything from food to gold and industrial metals and supply trails behind.
Total commodity assets under management is projected to end the year at $340 billion after starting 2010 at $270 billion, as prices rise and investors pour money into commodities, according to Barclays Capital.
>>Top 10 Commodity Stocks of 2010
In a survey of more than 300 institutional investors, including hedge funds and professional money managers, 69% of the respondents said they will initiate or increase their exposure to commodities over the next three years. About 60% said the annual average benchmark commodity returns will be about 6% to 10% in 2011, while 28% estimate returns will exceed 10%.
Most investors said they sought commodities for portfolio diversification, but 36% said they bought commodities for absolute returns, in another sign of bullishness in the asset class.
Commodity prices remain hugely dependent on China's demand. Investors will be closely watching for measures its government takes to curb inflation and cool its overheating economy.
Regulation of commodities markets in a bid to curb speculation amid rising food prices could also hurt commodity prices.
Read on for an outlook on the main commodity classes and tips for how best to trade them.