Forget commodities - here's a real investment bubble

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The stellar performance of commodities in recent years has catapulted them into the spotlight of the mainstream media.

The farsighted contrarians who first bought gold and mining stocks at the bottom of the cycle, have no doubt been unnerved to see regular front-page articles on investing in the yellow metal starting to appear in their daily newspapers.

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And yet, it's amazing how quickly sentiment can change. The plunge in stock markets has left commentators clutching for something to blame. And the consensus seems to be that commodities have been in a bubble a bubble which is now bursting.

But of course, the bubble' that everyone's pointing at is rarely the one you should actually be worried about...

We can think of quite a few other markets which qualify for bubble status. UK consumer debt, for example.

The UK's third-largest bank, Barclays, said that profit growth in the three months to March 31 beat analysts' hopes, as its investment banking unit outperformed its competitors. Unfortunately, bad debts at its Barclaycard unit are also rising faster than the City had expected.

The group said the rate of growth of bad debts was similar to 2005, when "overall charges rose over 40%", according to Reuters.

"Our core concern for UK banking remains that we've started a cycle of deterioration in credit quality in the UK,' said analyst James Hamilton at WestLB. 'As yet it's very difficult to see where that will end."

Another bubble that everyone seems to have taken their eyes off is in commercial property. But the clever people at Barclays have realised that now might be time to quietly lock in some of their profits.

"In recognition of historically low yields on property, we have taken action to realise gains in part of our freehold property portfolio," the bank said.

So who did Barclays sell their freeholds to? Interestingly enough, at least some of the branches were sold to the man in the street.

Last month, The Times reported on a commercial property auctions, aimed at the general public. And among the 147 freehold properties that were sold off to buyers such as "small businessmen, shopkeepers, pharmacists, lawyers and hoteliers" were 19 branches of Barclays.

One branch, in Stansted, "sold to a local investor at a rental yield of just 3.4%, one of the lowest yet at one of these events."

Read that again. 3.4%. That's 1.1 percentage points below the UK base rate. It has to be a sure sign of a bubble when you'd get a better return by sticking money into a bank account than by buying an actual bank branch.

So what about the commodities sector then? Are insiders selling out to rank amateurs there as well?

Actually, no. As Edward Hadas on Breakingviews.com points out, miners are putting their money where their mouths are. Xstrata has recently bid $15bn in cash for Canadian copper and nickel miner Falconbridge.

That's a big bet to make. But then you'd hope that the chief executive of a mining company would have a good idea of whether or not the market is in a bubble. And Xstrata boss Mick Davis clearly believes that current high metal prices are justified. As Mr Hadas puts it - "Investors should not dismiss his confidence out of hand."

As for BHP Billiton and Rio Tinto, Goldman Sachs reckons that base metal prices would need to fall at least 30% from current levels before the broker would need to downgrade its earnings estimates for 2007.

"We would regard being able to buy the world's major resource stocks on current [price to earnings ratios]...when they have the opportunity to benefit from Chinese growthas an exceptional opportunity."

Of course, with the market remaining jittery, miners (and most other stocks) may yet have further to fall though they may not, given that Thursday's recovery seems to be continuing this morning.

But here at MoneyWeek, we'd still feel a lot happier about being invested in the commodities sector than in anything directly exposed to the UK economy like commercial property, for example.

There's more on why the commodities bull market isn't over in this week's issue of MoneyWeek, out today. Subscribers can download their copy right now by clicking here: Latest issue

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Turning to the stock markets...

The FTSE 100 rallied, helped by a solid start on Wall Street. The blue-chip index closed 90 points higher at 5,677. Sugar and sweetener maker Tate & Lyle was the top riser, climbing 6% to 564p after full-year results beat City hopes. Chilean copper miner Antofagasta also did well, up 4% as strong copper prices boosted its first quarter results. For a full market report, see: London market close

Over in continental Europe, the Paris Cac 40 gained 79 points to 4,949, while the German Dax rose 118 to close at 5,706.

Stock markets also headed higher across the Atlantic. US economic growth for the first quarter came in at an annual rate of 5.3%, revised up from an initial estimate of 4.8%. But the rise was less than analyss had expected, and helped soothe fears that interest rates will have to be hiked again soon. The Dow Jones Industrial Average climbed 93 points to 11,211, while the S&P 500 leaped 14 to 1,272. Meanwhile, the tech-heavy Nasdaq climbed 29 to 2,198.

In Asian trading hours, the Nikkei 225 jumped 277 points to 15,970 as US economic growth data eased inflation fears. Exporters were among the main risers, while lenders such as Mizuho Financial also benefited as consumer prices rose for the sixth month in a row in April.

This morning, oil headed higher in New York, trading at around $71.50 a barrel. Brent crude was also higher, trading at around $69.95.

Meanwhile, spot gold was higher, trading at around $654 an ounce, while silver traded at around $12.72.

And here in the UK, betting chain Ladbrokes (formerly the Hilton Group) said it has made a decent start to the year, with trading in line with its expectations after horseracing results at Cheltenham and Aintree favoured the bookies.

And our two recommended articles for today...

Eight reasons why gold is still cheap

- Gold's recent slump after its stellar ascent has scared many funds out of the market. But they may live to regret it, says Daniel Sacks, Head of Resources at Investec Asset Management. Oil prices are still high, the dollar is weakening and geopolitical tensions continue to mount. To learn the eight reasons why he believes gold's bull run is far from over, click here: Eight reasons why gold is still cheap

A beginner's guide to investing in funds

- Investing in funds can be a good way to get exposure to an asset class or stock market without staking all your money on one company. But how do you go about choosing the right fund? And just what exactly is an Oeic, anyway? To find out all this and more, click here: A beginner's guide to investing in funds