Investors may create bubble in oil, metals

SPECULATIVE bubbles may be forming in commodity markets as investors seek safe havens from uncertain stock markets.

Investors may create bubble in oil, metals

ANALYSTS warn that speculative bubbles may be forming in commodity markets as global investors increasingly seek safe havens from uncertain stock markets and a weak US dollar, pushing gold and oil prices to record highs, and buoying base metal prices.

Commodity prices surged again yesterday with oil approaching $US105 a barrel, buoyed by declining US inventories and the OPEC oil cartel refusing to raise production. Military tensions between oil-rich Venezuela and neighbours Ecuador and Colombia provided further price support.
Gold hit a record high at $US991.80/oz on Wednesday and late yesterday remained at over $US986/oz.

Metals prices were also strong, with copper and aluminium prices approaching record highs as investors increasingly bet that Chinese demand will continue to grow strongly despite a slowdown in the US and Europe - what economists call the  "de-coupling'' of Asian growth economies from downturns in developed economies.

Copper, aluminium and nickel prices are up about 30 per cent so far this year.

But with investors wary of equity and property markets in the wake of the global credit crunch, there are concerns that liquidity boosted by US interest rate cuts could be creating speculative bubbles in commodities.

Metal prices prices have been buoyed by power shortages in China that are expected to ease, and there are concerns that a fall in copper stocks on the London Metal Exchange may be partly contrived as some stocks are held off market.

"We have been pretty optimistic about China and we expect the decoupling will prove to be the right way to call the current situation but (given the US rate cuts) you tend to worry a bit about the next bubble and there could be some speculative activity here,'' Westpac's global head of economics Bill Evans told The Australian.

Two weeks ago, the founder of Platinum Asset Management Kerr Neilson told The Australian that mineral prices were ``simply far too high''.

"Take iron ore, for example, which has been ramped to ridiculous price levels. The clowns are taking over and there will be an awakening one day,'' he said.

National Australia Bank's minerals and energy economist Gerard Burg said investment money had become a significant part of commodity markets in recent years, and that speculative money is now quick to buy into any tightness in metal markets.

But he said the demand fundamentals remain intact on the back of Chinese growth. And he believes last month's 65-71 per cent iron ore price settlement is encouraging optimism on China.
Mining giants BHP Billiton and Rio Tinto both this week reiterated their faith in a strong outlook for Chinese metal and mineral demand.

"We expect continuing double-digit GDP growth in China in 2008 and metals demand to continue to rise at a rate well above GDP growth,'' Rio chief executive Tom Albanese told a mining conference in Canada.

Speaking in Melbourne on Wednesday, BHP chairman Don Argus was similarly upbeat.

"China metal demand is growing and there is no evidence at this stage that this demand is abating,'' Mr Argus said.