Commodities & Speculation

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Q: Do you feel that speculation has played a major role in the recent skyrocketing price moves in energy and agricultural commodity futures? or are food and gas prices rising because of other factors?

A: When Corn was at $2.00 a bushel and oil was trading at $20, were these prices based on fundamentals? Maybe ample supplies and steady demand.

Speculators cannot be blamed for the current values in physical commodities. Fundamental factors are actively at work as growing worldwide population (from 3.5billion to over 6 billion in the last 40 years) and a growing middle class demanding more bread, cars, energy, protein and more continue to grow. Alternative energy is putting pressure on Corn (Ethanol), Soybean Oil (Bio-diesel) and Sugar (Ethanol).

Speculators can cause temporary price distortions and increase volatility by being much more active in a given market (such as we’ve seen in Crude Oil), however speculators cannot cause rising prices year in and year out.

One cannot dismiss inflation (in spite of what the Fed reports), the devaluation of the US Dollar (down more than 40% against the Euro), rising global demand for energy and food from the rising middle classes, particularly in Asia (more than 2.5 billion people in China and India alone) and pin the blame on speculators trying to capitalize on these large moves. Keep in mind that all speculators are not necessarily getting rich.

Q: Would raising margin requirements, as some politicians have proposed, help or hurt the situation?

A: The government and politicians are always only too eager to enact another law to interfere in the markets because they want to get re-elected and not because it is in the public interest. I believe that instead of attempting to appease public opinion by pretending to “do something” about rising oil prices, they should focus on matters that affect taxpayers. The markets are very efficient and the exchanges have done a tremendous job of adjusting margins as volatility increased. Whatever their formulas may be, they work and are justified and not decided arbitrarily.

Politicians should not tell businesses how to run their business; just look at the current deficits.

Manufacturers , distributors and other businesses that use or distribute energy need the marketplace to hedge far out in the future (airlines for example) will be directly affected.

When raising margins, this should be taken into consideration as well.

Q: Should there be an intervention, or will the markets work themselves out?

A: I am not an economist, but history tells us that “the cure for high prices is high prices”; in other words, consumers will slow down consumption, which will drop demand which in turn will force prices lower. I believe that any decision driven by human emotion and over-reaction to satisfy an immediate “craving” will never lead to anything positive.

Q: Please feel free to expound on these topics and provide a little insight as to why you feel the markets are the way they are right now.

A: Last point, the responsibility of the future market is not to keep prices low.

Rather, speculators assume the risk for producers and end users to fix their prices.

 

Past performance is not indicative of future results. There is a risk of loss in futures trading.