Chinese Inflation Fueling Copper Bubble?

Anticipatory increases in commodity prices, as with interest rates, are deflationary because they raise costs for business and consumers and thus far, the Federal Reserve has not pumped enough currency into the economy to offset credit losses.

The copper debate lies on the critical fault line in the recovery/recession, inflation/deflation debate. Both inflationists and deflationists may agree that whether they are right about the direction of inflation, speculative commodity-buying based on inflation expectations rather than growth expectations is not a healthy way to revive the economy.

If it's based on real demand, however, the increase in copper demand signals an economic recovery is underway. Investors taking the optimistic side of the argument can try iShares Chile(ECH), which is close to a 52-week high due to the rolling off of higher prices from last summer. iShares Peru(EPU), a newer ETF with much less liquidity, also offers indirect exposure to the commodity. Those looking for a widening of the rally to other metals can consider PowerShares DB Base Metals(DBB), which holds aluminum, zinc and copper.

Pessimists may want to simply avoid the sector. PowerShares does offer inverse ETNs based on the same index underlying DBB, but they are very illiquid to the point of being untradeable for even small investors. PowerShares DB Base Metals Short ETN(BOS) averages 900 shares per day compared to 3,000 shares per day for PowerShares DB Base Metals Double Short ETN(BOM).

Either way, many eyes have turned to copper as a gauge of economic recovery, and therefore it behooves investors to stay on top of developments in this market.

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