Copper and gold are leading the commodities markets higher again Wednesday, but with accompanying fears that a bubble is gathering pace.
Copper, an industrial metal used in housing and construction, is now trading above $6,960 a metric ton and making new 2009 highs daily. Gold is meanwhile in uncharted waters above $1,145 a troy ounce as predictions of $1,200 an ounce by the end of the year look increasingly likely to be realized.
The gains are helping to lift other metals such as aluminum, platinum and silver, leaving oil and the softs markets in their wake.
Pivotal to the move in metals is the role of the U.S. dollar, which has become a currency investors borrow and then sell to invest in foreign securities. That practice, known as the carry trade, contributes to dollar weakness but helps offshore investments.
With U.S. interest rates near zero, carry traders have been busily selling dollars to fund purchases of assets such as commodities, irrespective of their underlying fundamentals. This momentum is only enhancing the attractiveness of the carry-trade strategy, as the dollar depreciates further and the rally in risky assets continues.
"Since a Fed rate rise seems to be out of the question for now, it will fall on the central banks to wrong-foot the speculators and intervene in the currency markets," said Ed Meir of MF Global. "Indeed, with remnants of another commodity bubble arguably gathering pace, we find it surprising that the central banks are not thinking about intervention more seriously," he said.
Few deny that the underlying fundamentals of some of the markets look positive, especially further ahead. The Baltic Dry Index, which measures the cost of shipping dry freight such as coal, iron ore or wheat across the oceans, hit a new 2009 high Tuesday, rising 161 points to 4381. Shipping analysts said the strength was the result of strong demand in China, which continues to drive both spot and time charter activity.
But most agree that it isn't supply and demand factors that are driving the current futures price moves.
"With recent data highlighting that inflation in most major economies is still subdued or in negative territory, the considerable rally in gold over the last two weeks seems to be purely speculative rather than driven by a real concern for currency debasement," said Elizabeth Gregory, market strategist at Advanced Currency Markets SA. "Whilst we may not be there quite yet, the concern for gold bulls from here should be the propensity for commodity markets to exhibit sharp rallies before so-called blowout reversals."
It's in the expected depreciation in the dollar and the accompanying reversal in other asset classes that the real problem lies. Alex Heath, head of base metals at RBC Capital Markets, said governments face a delicate balancing act.
"Get it right and the economies will slowly recover and fill the rapidly increasing void between current perceived and real market values," he said. "Get it wrong and the horrors of the double dip will become a reality that no one wants to face," he added.
