Interesting and long article from the Australasian Investment Review on the state of base metals, and why they appear to be overpriced. This section on chart backwardation is particularly informative (note: definitely read this if you've ever wondered why futures charts slope downward, even as everyone expects the core price to rise):
Now let’s take a look at the forward curves. The futures market (as well as the over-the-counter forward market) allows for metals to be bought or sold for delivery dates into the future on a price determined today. Traditionally, base metal forward curves are "backwardated", which is a sexy word that implies the further into time you go, the lower the price.
Backwardation of future prices is not always an easy concept to grasp for the uninitiated. Brokers will often tip prices to rise into the future, and then set a future price which is lower than today’s price. This confuses the hell out of some investors. Backwardation occurs, however, because under normal circumstances a consumer will choose to de-stock inventories when prices are high, and re-stock when prices are low. This smoothing pattern means future prices (as set today) are rarely higher than spot prices, because why pay more for something you can buy now and store?
But then this doesn’t prevent the spot price rising in the future, given that as we move through time, different circumstances will prevail. What is important at present is that inventories are low, and forward curves, while remaining in backwardation, have made a fundamental shift to higher levels. Take this copper graph as an example.
Note that while spot prices were sufficiently different in January 2004 and January 2005, the further one moved out the forward curve the more the longer dated prices reverted to a similar level. As we can see, it’s a different story in January 2006. While still backwardating, the forward curve has shifted to incorporate a higher "ultimate" price.
What this means is the market has come to believe that historical average prices are just that – history. We are in a new age. Further evidence, it would seem, that silly metal prices are silly for a reason.