Bubble Watch

All that speculative money just sloshing around out there:

A bubble has formed in commodities as "speculative fervor" returns to markets after the global financial crisis, veteran Wall Street economist Henry Kaufman said on Monday.

"There are bubbles in commodities," and probably in the gold market as well, Kaufman, president of financial consulting firm Henry Kaufman & Co Inc in New York, told the Reuters Investment Outlook Summit in New York. He cited the return of leveraged bets as one driver.

Because commodity markets are small compared with some other financial markets, comparatively modest shifts out of other assets could increase the risks in commodity markets, he said.

Kaufman also cited some risks to the U.S. dollar and said it is debatable whether the dollar is bottoming, though he added that the currency's retreat has so far been orderly, and that inflation is not likely to be a problem for the foreseeable future.

However, the "speculative fervor" where participants are borrowing heavily in short-dated markets "might be a risk for the dollar," Kaufman said.

Investors, spurred by near-zero U.S. interest rates and easy availability of funds, have borrowed huge sums of money in dollars in recent months to purchase higher-yielding assets in so-called "carry trades."