Is this the next financial bubble?

10th November 2010

Base metals like copper, tin and nickel suffered sharp falls during the global economic slowdown, but are now recovering strongly thanks to the high demand from the Asia Pacific region.

The reason the traders are concerned is because of plans on the part of investment banks to launch new physically backed base metal funds. Most of the existing products invest indirectly via the associated futures contracts.

One trader is quoted in the Daily Telegraph as saying: "Metals like copper are in intense demand. By buying futures contracts, investors have never impacted the physical cost or supply of copper.

"But allowing investors to hoard physical supplies is the equivalent of allowing investors to sit on warehouses of wheat while Tesco is short of bread."

Not everyone is convinced that the new physically backed funds will be a good option for investors. Commodities Now says that they will push up prices in the short-term, but warns that the long-term returns will be undermined by the cost of finance and storage.

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