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Base metals offer futures alternative

Bond investors finally appear to be getting the message that exposure to commodities can be a useful hedge in a portfolio. And if they have invested in the right commodities, they could find themselves in an excellent position to profit from any forthcoming US interest rate rise.

The latest Commitment of Traders report from the US Commodity Futures Trading Commission (CFTC) shows that after years of shying away from this esoteric asset class, investors are in fact pushing capital into energy, base metals and precious metals in the greatest volumes since 1983.

It is not just speculative traders that are driving this trend, according to Deutsche Bank. "Speculators come in and out of the market but pension funds are now leaping in, and that is unlikely to reverse," says Michael Lewis, the bank's new head of commodities research.

Capital inflows into commodities have become so pronounced that concerns are mounting that a bubble is being created. "Speculative inflows do increase short-term volatility risks, but we are starting to see new pension fund structural money coming in," says Lewis. But he adds: "It would be extreme to say we are seeing a commodities bubble."

This is because even with price rises, several commodities still look cheap.

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