By Jorn Madslien BBC News business reporter

High oil prices can help boost your pension

The ongoing boom in commodity prices, which is largely driven by soaring demand for energy and raw materials from manufacturers in China and India, has attracted a new breed of investors.

Institutional investors, such as pension funds and assurance groups, are increasingly seeing commodities as a distinct asset class to be included in their portfolios alongside more traditional investments in shares and bonds.

A key driver for the change is that institutional investors are unhappy with the returns they are getting from traditional investments, say bankers involved in this burgeoning market.

"This decade is being characterised by a significant deterioration in the performance of bond and equity returns," according to Deutsche Bank Global Markets Research.

Commodity index growth so far this year: Goldman Sachs: 26.9% Dow Jones-AIG: 17.3% Deutsche Bank Liquid: 15.5%

Equities, "which were increasingly perceived as a low risk, high return asset during the 1990s... have become a high risk, low return investment during this decade", while bond returns "are under threat from strong growth, inflation shocks" and persistently low interest rates, according to the bank's research.

In other words, buying shares in companies, particularly in Europe and the US, now appears risky since many of them face uncertain futures, with costs rising due to high energy and raw material prices and with growing competition from Chinese or Indian firms.

Lending money to companies or governments, which often use the bond market to raise finance, is also unattractive because low interest rates mean yields are low.

Commodity prices, meanwhile, have not only soared in recent years; many analysts predict they will continue to rise, because of growth in demand and a scarcity of resources.

Oil and metals

This is particularly the case for energy commodities, that is coal, oil and gas. Whereas all commodity indexes have registered sharp growth this year, the best performers have been those where energy commodities make up a solid chunk of the total.

Industrial demand for copper outstrips supply

The Goldman Sachs Commodity Index, which has risen almost 27% this year, has a near 80% energy sector weighting. Think high oil, gas and coal prices and the reasons why become obvious.

But it is also true for commodities used by industrial manufacturers.

"Those in the metals markets will have noticed the push into metals and I think we'll see more of that," says Douglas McWilliams, chief executive of the Centre for Economics & Business Research.

Take aluminium, where returns have reached 7.7%, and "this year is expected to mark the third consecutive year of double digit positive returns for aluminium", according to Deutsche Bank.

Or platinum, used in catalytic converters for cars, which recently reached its highest level since early 1980 in London trading amid talks that it might soon break through the psychologically important $1,000 a troy level.

Iron ore miners have also seen prices paid by steel makers soar - up about 70% in the last year.

Copper is another example, according to Mitsui Bussan Commodities research: "Copper's growth prospects in all power applications appear promising as cabling in office, home, and vehicles intensifies."

Says Patricia Mohr, vice president of economics at Scotiabank Group: "Copper is still in a deficit where global demand exceeds producers' ability to produce metal".

Stabilising effect

But high commodity prices are not merely the result of scarce supplies and rising demand.

China's taste for metals, oil and other commodities boosts prices

Demand from institutional investors competes with demand from industrialists, and this too pushes commodity prices higher.

This raises costs for manufacturers, squeezing their profits and leading to inflation as firms try to pass on price rises to their customers.

This in turn hits company share prices, making the shift from equities to commodities even more attractive for major investors.

It is a vicious, or virtuous, circle (investors and manufacturers have different views on this), which some say is largely generated by speculative trading by commodities funds whose activities tend to make commodity markets more volatile.

But the overall effect of such footloose investment is limited in the long term, say market players.

Index-linked investment by institutional investors also has a stabilising effect because they take a long-term view of the market, according to one trader with a large investment fund.

Besides, adds Ms Mohr: "the Chinese involvement is not speculative. It's really quite real.