Assume you own a tulip bulb. There seems to be a bit of a craze for them - owning your own tulip bulb collection has become a trend, after David Beckham revealed that he loved them.
You don't actually want this tulip bulb - it was a present from a friend - but you do want to get a decent price for it. You could sell your tulip bulb for a fiver - that's the going price at the moment. Except...
They used to cost a pound or so, and only gardeners wanted them, but since this took off you've noticed that prices are slowly going up - there aren't enough tulip bulbs around for everyone to have one, so people are offering more for them. In fact, it looks like prices will be £10 a bulb in a few weeks, if things carry on like this. So you won't sell now - you'll only sell when the price hits £10.
Of course, you're not alone in feeling this - lots of other people have spotted that prices are going up, so they also aren't selling for £5. And the few bulbs that _are_ going for £5 are being snapped up by people who think that they can make a quick profit by buying up £5 bulbs and selling them on in two weeks time.
Heck, some people are taking out loans so that they can buy up bulbs en masse and make a fortune on them. And as prices are definitely going to hit £10 they're willing to pay £7.50, £8 or even £9 to buy a bulb. If you're buying a load of them then it's _so_ worth it.
Of course, with the prices rising _that_ fast they're going to hit £20 in a couple of more weeks - so there's no point selling at £10 any more - there are better profits to be made, if you just hang on a little longer. Heck, if prices keep this up for a few years then you'll be able to retired, based on just this tulip! Everyone knows that tulip prices are a good investment, and so they are.
Except that after a while, the people who are buying up bulbs are _just_ the speculators. The gardeners can't afford them any more. And some of the larger speculators have stretched themselves an awful lot - they've bought _thousands_ of bulbs, taken out expensive loans that they have to pay back soon, and the prices aren't being pushed up as much as they were. If the prices don't keep going up then they're stuffed. And the prices aren't going up as fast as some of the more excitable people thought they were.
And then the first speculator fails - they need some cash in a hurry, so they sell their tulips for as much as they can get - just about scraping a profit, and get out of the market. The people buying the tulips from them weren't paying as much attention to the market as they should have been, and they just bought a bunch of tulips for more than you can get for them, any more. Other speculators, sensing an imminent collapse, try to dump all of their stock at once.
The market plunges into freefall, prices plunge, and the marketplace is flooded with bulbs. Suddenly, because everyone knows that tulips are a terrible investment, they are. Eventually, things calm down. Everyone who doesn't actually need tulips has sold up, and moved onto the next big thing (I hear that rare comics are worth investing in). You're left with your tulip. If you pop down the gardeners market you can get a pound for it, if you're lucky.
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I saw this happen with comics in the early nineties (see Neil Gaiman's essay Gods and Tulips, which is at least partially inspirational for this) . I saw it happen in the DotCom bubble (which I was predicting the end of about 18 months before it plunged). It happened in the housing market recently, and it's happening right now with oil (still on the way up - massive profits to be made if you're the last person to sell up before the market crashes).
When prices are going up, the investors pile in and push the prices up further. When the prices are going down, the investors pile out and push the prices down further. Eventually the prices end up back where they started. But all it needs is for there to be some kind of internal event that makes the prices vary by more than the rate of inflation, the subject becomes an investment target, and boom, you're onto the boom/bust rollercoaster.
If you know what you're doing, you can ride this rollercoaster, and make money both ways - buy cheap on the way up, sell expensive on the way down. Chance are, if you're reading this journal you _don't_ know what you're doing. In which case the best you can do is watch the overall pattern repeating itself every few years with a new commodity and look forward to laughing at the idiots when it collapses around them.
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