rbstern
05-22-2008, 03:57 PM
There was fascinating congressional testimony on Tuesday by a Wall Street fund manager on what speculative commodity index trading is doing to commodity prices. I've included a link to the testimony at the bottom of this post.
He testified that major investment funds (pensions, institutional, university endowments, etc.) have become huge players in commodity speculation since 2002.
Because of the loopholes in commodities trading laws, they have skirted some of the rules regarding position limits, and therby driven up worldwide commodity prices in the last five years, way beyond actual demand for the commodities themselves.
For example, he showed figures that this new money has purchased nearly as many barrels of oil futures as China's demand for oil has increase during the same period. In other words, these investors have driven up demand as much as China has during the same period.
Traditional speculators can justify their activity by providing markets with liquidity. But the size of the positions taken by these index commodity speculators is too large to serve any practical market purpose.
He describes it as "virtual hoarding" on a massive scale, with little or no benefit to society.
I've been puzzled by gas and commodity price run ups, so I delved a bit into his supporting data. One of the charts in his presentation shows the index fund demand for lead in the last four years. Not surprisingly, the year by year increase index fund money chasing lead closely matches the price increase curve of lead shown on the London Metals Exchange during the same four year period.
Here's the paper. Worth your time to read and understand:
http://hsgac.senate.gov/public/_files/052008Masters.pdf
He testified that major investment funds (pensions, institutional, university endowments, etc.) have become huge players in commodity speculation since 2002.
Because of the loopholes in commodities trading laws, they have skirted some of the rules regarding position limits, and therby driven up worldwide commodity prices in the last five years, way beyond actual demand for the commodities themselves.
For example, he showed figures that this new money has purchased nearly as many barrels of oil futures as China's demand for oil has increase during the same period. In other words, these investors have driven up demand as much as China has during the same period.
Traditional speculators can justify their activity by providing markets with liquidity. But the size of the positions taken by these index commodity speculators is too large to serve any practical market purpose.
He describes it as "virtual hoarding" on a massive scale, with little or no benefit to society.
I've been puzzled by gas and commodity price run ups, so I delved a bit into his supporting data. One of the charts in his presentation shows the index fund demand for lead in the last four years. Not surprisingly, the year by year increase index fund money chasing lead closely matches the price increase curve of lead shown on the London Metals Exchange during the same four year period.
Here's the paper. Worth your time to read and understand:
http://hsgac.senate.gov/public/_files/052008Masters.pdf