Mark, with all due respect, if you are a futures trader you can't possibly believe that unregulated massive futures trading does not effect the price of commodities. I think that you are trying to cover you a$$ (dollar signs included) by posting this condescending "Oh, don't worry, little people" kind of tripe.
SPONSORED BY:
- 1
- 2
Let’s Shoot the Speculators!
Email To A Friend
Please fill in the following information and we'll email this link.
SPONSORED BY
These extra funds might drive up prices if they were invested in stocks or real estate. But commodity investing is different. Investors generally don't buy the physical goods, whether oil or corn. Instead, they trade "futures contracts," which are bets on future prices in, say, six months. For every trader betting on higher prices, another is betting on lower. These trades are matched. In the stock market, all investors (buyers and sellers) can profit in a rising market and all can lose in a falling market. In futures markets, one trader's gain is another's loss.
Futures contracts enable commercial consumers and producers of commodities to hedge. Airlines can lock in fuel prices by buying oil futures; farmers can lock in a selling price for their grain by selling grain futures. What makes the futures markets work is the large number of purely financial players—"speculators" just in it for the money—who often take the other side of hedgers' trades. But all the frantic trading doesn't directly affect the physical supplies of raw materials. In theory, high futures prices might reduce physical supplies if they inspired hoarding. Commercial inventories would rise. The evidence today contradicts that; inventories are generally low. World wheat stocks, compared with consumption, are near historic lows.
Recently the giant mining company Rio Tinto disclosed an average 85 percent price increase in iron ore for its Chinese customers. That was stunning proof that physical supply and demand—not financial shenanigans—are setting prices: iron ore isn't traded on futures markets. The crucial question is whether these price increases are a semi permanent feature of the global economy or just a passing phase as demand abates and new investments increase supply. Prices for a few commodities (lead, nickel, zinc) have receded. Could oil be next? Barron's, the financial newspaper, thinks so.
Politicians now promise tighter regulation of futures markets, but futures markets are not the main problem. Physical scarcities are. Government subsidies and preferences for corn-based ethanol have increased food prices by diverting more grain into biofuels. A third of the U.S. corn crop could go to ethanol this year. Restrictions on offshore oil exploration and in Alaska have reduced global oil production and put upward pressures on prices. If politicians wish to point fingers of blame for today's situation, they should start with themselves.
© 2008
- 1
- 2
Presented By
My Take
Each Newsweek reader is different—and now your Newsweek can be, too. Use this page to create a experience that's personalized for you and your interests. My Take: it makes Newsweek whatever you want it to be.
Discuss