The charge-sheet against commodity speculators is flimsy
ONIONS are an important ingredient in the history of commodity speculation.
In 1958, after American growers moaned that speculators were behind
prices, legislation banned trading in onion futures.
the turmoil speculators are believed to cause that Nicolas Sarkozy may use France’s presidency of the G20 to push for rules to curb their activities
around $320 billion of institutional and retail money is now devoted to commodities, compared with just $6 billion a decade ago. That sum does not include hedge funds, whose involvement is significant but difficult to quantify.
Commodities diversify portfolios: in theory, at least, price moves are uncorrelated to shares and bonds.
They act as a hedge against a depreciating greenback.
Wheat prices spiked this August after a drought and fires in Russia, an important supplier, prompted an export ban. The recent surge in sugar prices comes after a bad harvest, that of corn after official warnings of a lower-than-expected crop.
Research published in June by the OECD shows no difference in volatility between agricultural commodities traded on exchanges and those (like onions) that are not. Indeed, the OECD found a “consistent tendency” for greater volumes of index-fund trading to sit alongside declining volatility
Sceptics point to the behaviour of copper prices in the latter part of last year. Normally prices and inventories should not rise at the same time, since higher stocks ought to bring down prices. The fact that both were rising simultaneously in the copper market had many worried that speculators were buying and hoarding the metal. Speculators were indeed at work but there is no evidence of hoarding.
American regulators are on the verge of approving physically backed copper exchange-traded funds, listed investment vehicles that have become hugely popular. Several institutions are planning to offer them. ETFs for other base metals could follow.
Almost all current investor activity is in futures markets. It is rare for investors to take physical delivery of commodities, so no raw materials are removed from the supply chain (another reason why investors are unlikely to affect spot prices).