In just a few days, the shakedown in the global commodities market has called into question the government’s budget forecasts, a set of numbers struck only a few weeks ago, before the rout, and delivered on Tuesday evening.

True, bulk commodities – coal and iron ore, which are priced in long-term contracts – dominate official reckonings of the nation’s output. Their prices lag the spot markets. Still, the volatility in base metals this month has been extreme.

With the price of copper descending to a five-month nadir on Thursday, the silver price butchered 28 per cent in two weeks and a couple of hedge funds teetering after near-death experiences, the question is: are these ructions simply a flushing out of commodity speculators with too much leverage – just another pullback – or something larger?

Since the government’s midyear economic and fiscal review in November there has already been a $10 billion blowout in next year’s deficit. That’s on the present numbers.

And the forecast of a $73 billion rise in government revenue to slot us back into surplus by 2012-13 – which hangs on a 36 per cent increase in company tax receipts – must be looking a tad ancient if we near the top.

Which brings us to a “warehouse financing” scam in China which now appears to be unwinding, forcing speculators to liquidate their real estate and commodities positions. Behind the scenes Beijing is furious with the speculators.

Essentially, the scam involves speculators getting loans which are supposed to be for buying base metals such as copper. Instead, they buy land then sell it before they have to settle on the commodity purchase.

It works like this. You are a property developer in China. You are already over your gearing limits and can’t get more finance at home. You can’t get the approvals to borrow offshore either. So, you use trade credit finance to fund your real estate deal. An associate then buys a stake to give you cash to pay for your copper. Later, the loan is repaid with the development proceeds.

There are two problems with this: one, it’s fraud. You have misled the bank over the use of your proceeds. And two, it only works when markets are liquid, and going up.

Property prices in China have held up lately but volumes are down. And metals prices have taken a shellacking. Deservedly, too; copper derivatives trading at three times the average cash cost around the world is clearly untenable.

As the Asia traders’ blogs point out, the risk of the trade finance scam seems to be spreading to the Asian high-yield market where a bunch of bond-issuing Chinese are scrambling to get US dollar funding.

“Extend and pretend is a good option for these guys while they try to work out all these dirt (real estate) loans they made to dirtbags,” is how one framed it. “No doubt the government will turn on the credit taps in case of emergency and run the Hang Seng index up in our faces one more time yet.”

In fact, Beijing hoisted its reserve ratios again this week, tightening credit for the fifth time this year, to hose down the fevered speculation. The Chinese love a punt, and their government, which has managed the greatest expansion in history with uncanny precision, is forever fiddling with the taps so the whole show doesn’t get too hot or too cold.

Meanwhile, in the US earlier this week traders were spooked by a lift in the margin requirement to punt oil futures. Some 70 per cent of oil contracts are held by speculators.

How much leverage can commodities markets withstand? Unlike stocks and bonds, commodities don’t carry a yield. No dividend, no coupon. Are the latest moves merely an adjustment in a macro trend? That will be difficult to tell until it’s all over. Official numbers, according to most China watchers, are opaque.

One thing’s for sure: domestic consumption is not as robust as capital spending, which has been the bulwark of China’s economy for years.

Among all the commodities, the wildest ride has been had in silver. And it is the state of the silver market which speaks loudly to the whole issue of speculation vis-a-vis reality. The gold rally has been understandable.

As the US economy groans under a leviathan debt load and Washington keeps recklessly flogging Treasury bonds to New York to expand the money supply, gold is a terrific hedge against inflation.

Until it was blown away this month, however, the silver price had somehow managed to outpace gold. And silver’s main industrial use, in photography, is now a thing of the past. Here was the definitive speculator’s metal in its biggest shakedown since the Hunt brothers famously tried to corner the market.

Incidentally, one of the brothers, the Texan billionaire Bunker Hunt, had made his fortune drilling for oil in Libya but ramped up his activities in the silver market after one Muammar Gaddafi nationalised the Libyan oil wells in the early 1970s.

Hunt and brother Herbert then began amassing a silver stockpile, taking the price from $US1.50 to $US50 an ounce in 1979 when Comex shut the market down and changed the rules on them.

Bunker was famous for saying: “Put all your chips on the table.” Silver soon collapsed to $US10 an ounce.

It seems a few speculators had all their chips on the table in the silver market earlier this month when the poor man’s gold again touched $US50 an ounce – only to get thumped back down to $US32.30 this week.

Silver led the carnage in commodities, just like the most speculative stock when a sharemarket bubble is pricked.