Investment demand has increased prices of base metals included in the major commodity indices by as much as 25% for aluminium, and probably accounts for a similar amount for copper and nickel, Peter Hollands of Bloomsbury Minerals Economics said Wednesday.

But this hasn't created a speculative bubble and has instead led to the development of hybrid metals that are being driven partly by industrial fundamentals and partly by investment, he said.

"Prices continued to rise despite periods of very negative sentiment with the funds trading from the short side," Hollands said. "The gains we've seen are investment-driven and not of a speculative mentality," he added.

Continuing increases in investment demand for metals are sustainable, Holland said. "If physical fundamentals also remain firm for some metals, the bull market may still have another leg to go," he added.

Speaking at the Commodities Investment World Europe 2006 conference in London, Hollands cited the example of aluminium, which is included in the Goldman Sachs Commodities Index.

This metal has demonstrated part-industrial and part-investment characteristics, he said, with stocks low but not rationed.

"Prices started to rise through the end of 2004 onwards even though stocks were rising, showing that some other force has come in and taken charge since then," Hollands said.

"Aluminium's cash price behavior has changed; prices are now 25% higher than they would previously have been, against an identical set of physical fundamentals," he added.

And the cash-to-three-months spread has also changed, adding $20 a metric ton to the contango since 2004, "which is what the rolling of investors' long positions will do," Hollands said.

He noted that aluminium's relationship with the major currencies has weakened but strengthened with industrial production growth, Hollands noted. "The market has survived some very negative sentiment so it doesn't suggest its gains were a bubble," he said.

"We think that investment in London Metal Exchange futures is the new price-driver in aluminium," he added.

A similar situation is true for copper, Hollands said, a metal also included in the GSCI and which also has a requirement for demand rationing due to low stocks.

"Where new price behavior kicks in, we have assumed – and not proved – that the commodities index funds' activities have added 25% to the modeled price, based on aluminium, and have attributed the rest to demand destruction," he said.