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Capital Markets

Commodities: Boom or bubble?

Commodity prices continue to break records, defying the spectre of slowing growth in the US and the performance of other asset classes. With some commentators attributing the price rises to the billions being poured in by investors, is it boom or bubble? Peter Koh reports.

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IF CHANGES IN prices are supposed to be triggered by changes in supply-and-demand fundamentals, then the rise of oil in March past $110 a barrel, on a day when data showed rising inventories and slowing demand growth and it’s subsequent fall days later blamed on a strengthening US dollar, seem to suggest that other factors are at work.

Indeed, those looking to understand oil’s more than 40% rise since last year will also be hard pressed to find their answer in short-term supply-and-demand fundamentals in the market for the physical product, which have not moved anywhere near as much.

Oil’s present disconnect from fundamentals has arisen not so much from the billions of investment dollars pouring into commodities in general as from its paper product’s transformation into the hedge du jour against rising inflation and the falling dollar.

Although Standard & Poor’s estimates that investors have poured as much as $40 billion into commodity investments since the start of the year, it is hard to pin the blame on new investor dollars for the rising use of oil as an inflation and dollar hedge. A recent survey of commodity investors by Barclays Capital suggests that only 11% are most attracted to the asset class for its potential as a hedge against inflation.

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