Credit Suisse Group AG (NYSE ADR: CS) is working with Glencore International AG, the world's largest trading house, on an exchange-traded fund (ETF) that will be backed by actual aluminum supplies.

And ETF Securities Ltd., a $15 billion U.K.-based firm that makes commodity-investment products available to retail investors, is offering U.S. investors gold-and-silver ETFs that are backed by the precious metals stored in vaults, instead of the more-conventional financial futures contracts.

ETF Securites is now also considering a U.S. oil fund that's tied to swap contracts with a member of Big Oil. It already has such an arrangement with Royal Dutch Shell PLC (NYSE ADR: RDS.A, RDS.B) in Great Britain.

Hedge funds and other institutional investors that invest in commodities are beginning to demand physical delivery – and not just futures contracts, the Financial Times reported last week.

Institutional investors are making these moves in order to sidestep expected regulatory changes. But with gold at near-record levels, and other commodity prices advancing, too, a major migration to the physical commodities market will translate into an actual jump in physical commodities demand.

Such a shift will push up commodity prices – and it has the potential to rev up inflation and cause major economic disruptions.

Regulatory Imbroglio

The world's hedge funds all piling into commodities doesn't matter much if the funds all stick to futures contracts. Dealers arrange the futures markets so that at expiration, the demand for physical pork bellies – or whatever – doesn't outstrip the physical supply.

Even the major purchases of futures contracts we cite in our example would likely be enough to push up the price of pork bellies. But that increase would be limited in scope and consumers have learned to deal with such increases in living costs. What's changing, however, is that the U.S.