Oct. 28--With some metals prices up more than 100 percent this year, analysts are warning commodity investors to be wary of a bubble.

Typically, prices rise when builders are busy constructing homes and factories are pumping out cars and other products. But with Americans nervous about jobs, the housing industry still in the dumps and industrial production way below levels of a little over a year ago, typical supply-and-demand forces are missing.

Analysts are hard-pressed to find a solid economic reason why metals such as copper and lead have more than doubled this year and have surmised that much of the move has come from traders simply chasing a rising investment, not fundamentals.

Many experts point to the same phenomenon in gold and crude oil. Both have risen sharply, with gasoline on average costing more than it did a year ago.

When commodities run up that quickly, it creates risks for investors who don't realize how fast momentum can turn a lucrative investment into a disappointment.

"Any individual playing the commodity game had better watch the momentum, because there are very experienced players in commodities who can short them (bet against them) at any time and cause metals to turn down fast," said Jack Ablin, chief investment officer of Harris Private Bank.

Adam Klopfenstein, senior market strategist in MF Global Ltd.'s Lind-Waldock division warns, "If the stock market goes down, the metals will too."

Both stocks and commodities are being driven by the same behavior: a globe awash in cash in the aftermath of Federal Reserve recession-fighting policies, and few ways for investors to make much of a return without taking risks in stocks and commodities.

If stocks start falling, Klopfenstein said investors will surmise that the economy is not strengthening enough to support recent metal prices. Although analysts say the economy will strengthen eventually, the risk is that investors will sour on commodities before growth occurs.

Deutsche Bank's commodities team, for example, said weakness in the dollar will set the stage for a rally in commodities through the end of this year, but they note that "unlimited central bank liquidity created the conditions for another mini-bubble."

They note that as people have invested in commodities for financial reasons rather than to use the metal, the typical underpinnings for prices have changed.

That makes analysis difficult even for the pros.

"Analysis of the aluminum market, although challenging, always used to be a relatively straightforward process," the analysts said in a report. "It involved an examination of future supply growth as compared to future demand growth."

That has changed because of investing behavior and because countries such as China and other buyers are stockpiling metals rather than using them. Under these conditions, investors could see prices fall sharply if the metal is released for sale, and supplies suddenly seem great.

Hilary Till, a commodities trader and principal in Premia Capital Management, said it is difficult to determine what is being stored and for what reasons.

Many analysts are having a difficult time making sense of the high prices.

"It seems to us that if output declines, then input of materials ought to be down by a similar order," said High Frequency Economics economist Carl Weinberg.

Yet, he notes that industrial production is down 13.7 percent from the level it was at just before the Lehman Brothers' failure sent the economy into a tailspin last year, and the price of copper is on par with the level that existed prior to the economic shock. Nickel prices are 10 percent higher.Although the uncertainty makes commodities a risky proposition, Ablin said clients are still encouraged to hold about 5 percent of their portfolio in commodities over the long term. Clients are typically given diversified exposure to commodities through the Pimco Commodity Real Return Fund.

Even though analysts see stocks and commodities moving in tandem, they often behave differently and consequently are seen as a staple in a diversified portfolio.

gmarksjarvis@tribune.com

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