Physically-backed industrial metal ETFs "have the ability to significantly tighten market fundamentals" according to a report by Deutsche Bank.
Writing in The Markets in 2011, Deutsche Bank global head of commodities research Michael Lewis argues that if investment demand grows to represent just 2% of global copper demand, this would translate to approximately 65% of copper inventories.
Copper, he says, is the metal most susceptible to price spikes as a result of ETFs attracting capital.
However the report does strike a note of comfort amid concerns over ETFs distorting prices, suggesting that gold would have to exceed $2000/oz for it to signify a bubble.
With gold currently hovering around the $1380/oz mark there is still some way to go before prices reach even the $1455/oz Deutsche Bank calculates as representing a real term all time high.
Lewis anticipates continued flows into physically-backed gold ETFs in the year ahead, but it is silver ETFs that come out of the report looking particularly appealing. Lewis says: "We believe silver has an even more attractive investment outlook than gold."
Silver has more industrial uses than gold, meaning its price has a greater correlation to the business cycle. The Markets in 2011 argues that while both gold and silver benefit from the same "safe haven" status, silver tends to outperform gold when the US manufacturing sector is expanding.
The report also says as long as the US Institute for Supply Management business confidence indicator remains above 50, we will see sustained downward pressure on the gold to silver ratio.
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