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Rapid growth in emerging market such as China has also sent the prices of other metals such as copper, zinc and nickel soaring. The value of copper has risen by more than 30% so far this year, reaching record highs; it broke through $6,000 a tonne last Tuesday.
But analysts are divided about the sustainability of the recent rallies, so investors are being warned to tread carefully.
Some investment specialists believe the commodity bull market, which began about three years ago, is still in its infancy.
Ian Henderson, who runs the JPM Natural Resources fund, said: “Having had a 20-year bear market in commodities, it would be terribly disappointing to have only a three-year bull market. But I don’t think that will happen. We are three years into a 20-year bull market, and I really believe this is a sector people should have exposure to.”
Others believe the recent activity has all the hallmarks of a bubble.
Mark Barnett, manager of the Invesco Perpetual Growth & Income investment trust, said: “I don’t have exposure to commodities and I admit I have been wrong not to do so because the rally has been a lot stronger than I’d expected. But I am staying out because now is not the time to buy.
“In the short term things look very overblown and we have seen bubble-like tendencies. My worry is that current prices do not reflect the underlying fundamentals.”
Barnett and other commodity bears believe much of the recent gains in metal prices are a result of momentum investing — rather than basing their investment decision on fundamentals such as supply and demand, people have been piling in because prices have risen so much, hoping others will buy at even higher prices.
Jim Wood Smith at Christows, a wealth manager, said: “There are very good reasons why metal prices have been going up, but the way values have moved over the last week or two suggests they are now being driven by momentum investors rather than fundamentals.”
The bulls believe there is more to the recent rallies than momentum and that prices are well underpinned. And there are some compelling reasons why the values of base metals such as copper, nickel and zinc should continue rising.
Alex Robinson of the wealth management division of Barclays Capital said: “There are big demographic changes in China as people move from the country to the cities. By 2015 there will be 80m more households in China, so demand for raw materials is not going to decrease.”
The bulls and the bears agree on one thing: commodities are highly erratic and prices can fall as quickly as they soar. This underlines why anybody who is considering investing in the sector needs to be cautious — and should prepare for a rocky ride.
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