A months-long price rally in caterpillar fungus, an expensive tonic ingredient popular among China's middle-class, might end as traders have forecast a good harvest this year.

The caterpillar fungus grows on the remote, humid mountain slopes on the Qinghai-Tibetan Plateau. It is usually harvested in May and June.

Traders in Tibet said this year's harvest has come early and the fungi are of good quality and ample in supply -- factors seen pulling its price back from its record high.

A kilogram of the dried caterpillar fungi -- about 3,000 pieces -- costs roughly 52,000 yuan (7,624 U.S. dollars) in early May this year, more than double the price a year ago, traders said.

The rare fungus' Chinese name - dongchongxiacao - literally means "winter worm, summer herb." Ground into a powder, the fungus is a valuable ingredient in traditional medicines and is believed to boost the immune system.

Tibet and its neighboring provinces of Qinghai, Sichuan and Gansu are where most caterpillar fungi grow.

A drought in Tibet in 2009 reduced the whole-year produce of the caterpillar fungi to 36,000 kilograms, down 25 percent compared with 2008. Stockpiling and speculation also fueled the price rally, said Dou Lianqing, a veteran Tibet-based trader.

Dou said prices have almost peaked and are set to fall on the forecast good harvest. Speculation that the 7.1-magnitude earthquake in Qinghai in April might have damaged the fungus harvest spooked the market, but the concern has proved unfounded.

"But I am still worried about an inflow of large amount of speculative capital," he said, adding that it may disturb the market and push back the prices.

Dou said investors now see the fungus as an increasingly attractive investment alternative to gold at a time when other investments promise only low returns.

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