Who's to Blame for the Commodities Boom? 36 comments
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As we enter the formative stages of Bubble 3.0, also known as the nascent commodities bubble, some are pointing their finger at Wall Street.
Speculators are likely the first to be blamed in any discussion of today's soaring commodity prices.
But the people who profit without taking delivery of a single barrel of oil, ounce of gold or bushel of corn may not have taken these assets to record highs without the encouragement and products of Wall Street banks and firms, according to some.
"The ugly truth is that the securitization of commodities has eased the way for money flows to raise commodity prices beyond that which the current fundamentals of the global economy can sustain over the long term," Michael Frankfurter, a fund manager at California's Cervino Capital Management, told a conference on base metals in New York last week. ...
There is no question that speculative inflows are helping drive commodity prices, but blaming investor interest for rising commodity prices is akin to blaming the symptom and not the cause.
Simply put, if there were not reasons to pour money into commodities, investors would not be doing so.
Investors are stampeding into commodities for both fundamental reasons - the emerging markets, lack of supply growth over the previous decades - and for economic reasons - the debasing of the currency by the Fed and the government. They were not pouring money into commodities a few years ago. But now, with the government on a deliberate path to erode the savings of investors and purchasing power of its citizens, people are looking for ways to protect their wealth.
Would gold be at $1000 had the Fed not looked the other way during the tech bubble by policy, responding only after the bubble collapsed by taking the Fed funds rate down to 1%, igniting a housing bubble with the predictable aftereffects? And would gold be where it is had the government not increased the deficit by cutting taxes and increasing spending?
Surely, commodities would be higher than they were five years ago even if the government had run more responsible fiscal and monetary policies. However, the reckless policies of both the Federal Reserve and the federal government have been primary drivers behind the soaring commodities prices, and the government's complete unwillingness to take any responsibility for the current situation is an utter disgrace.
Disclosure: I am long gold, Canadian energy income trusts, coal stocks and sugar futures.
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This article has 36 comments:
Just like short sellers who create nothing, these speculators who profit by creating and/or selling nothing are absolutely to blame. And, when the entire economy goes down the tubes because of ridiculous prices at the consumer level – whom will you blame then??
Stop blaming everyone else and simplify the markets. It’s time to take speculation out of our lives. Get real! You want to gamble – go to Vegas!
Never have so many competed for so little. The truth of the matter is demand far outpaces supply....if one has to use a comparison, use the Industrial Revolution in the USA, multiply it by 5 and add multiple constraints which did not exist 150 years ago...like environmental concerns, the "not in my back yard" syndrome, lack of water supplies, use of destructive fertilizers like nitrogen which removes oxygen from water, infrastructure which is rapidly deteriorating but finds itself competing in a global economy.
The supply picture cannot cannot meet the demand picture because the constraints on supply now stretch into years, but the demand is current and rising.
The world needs a worldwide recession to allow commodities to play "catch up" but guess what, demand slows and the much needed expansion stops.
Catch 22.
Perhaps the money flow into commodities (bubble?) will provide enough impetus to force the world's governments to come up with a worldwide solution to the proper management of all commodities sooner than later.
Structural changes to the way we grow food, use metals and energy must happen. I would prefer the change to not occur from inflation/recession resulting from a commodity bubble but the ball is in the policy-makers court.
Perhaps we should send letters to your member of parliament or congressman indicating the need for government policy change at every level with regards to all commodities.
Bottom line, free market is going to force changes one way or another. Proper government planning is needed to moderate those changes.
By the way.."Just like short sellers who create nothing, these speculators who profit by creating and/or selling nothing are absolutely to blame." Speculators "create" LIQUIDITY. They put their own money on the line and risk their capital by creating liquidity.
Again if one is so confident that prices are so out of line...do something about it, add to the liquidity pool by taking the other side of the trade. Stop complaining about speculators being the problem, at least they put their money where there mouth is.
We will all see very soon that the world goverments will step in and consolidate supply and demand rates. In other words they will set caps per country on how much of supply you get for a yearly basis.
Of course this will not work....thats when things get very interesting.
I'm sure wall street is the culprit who started it as another way to make $$$. My question is why not do away with betting (speculating) on a particular fund/stock/commodity going down? Yes if something goes up yes it will come down also but why try to bet on where and how much. To me it does sound like gambling....just another way to make a dollar.
The worlds fisheries are in collapse, there is strong evidence we have reached peak oil, another billion babies are already calendered in, and water is the new champagne. Many people are anticipating some serious events on the horizon and commodity pricing is a sign, not the event itself.
Higher commodity prices due us all a favor by focusing our attention on the limits of our resources. Consumers in developed nations have had so much for so long with such ill effect that an awakening to scarcity at this juncture is a welcome event. Now it looks like we will be sharing the goodies with India and China as they appear likely to repeat many of our past mistakes and have the money to do so.
The question is not "who is to blame" it is "what are we going to do about it"?
World demand for commodities is not going to be limited by the rest of the world, who wants our lifestyle and quality and choice of products.
The US standard of living is coming down whether we like it or not. We have to pay the piper for our economic excesses.
As far as I know, profiting from futures contracts without planning to take delivery has been happening as far back as Holland in the 1600s! Or look back the the 1970s when commodity/future trading was previously in vogue.
Blaming speculators and short sellers is always a silly strategy in a world with 2-sided markets and gigantic money flows.
What is a speculating anyway?
Someone who thinks they know where the price is going to be at a point of time in the future. It has always been thus.
I own 80% of my portfolio in long commodity based equities, and I'm outperforming the market, plus a few ETF's that are long silver and gold.
Is this specualtion? Of course it is.
Do I contribute to the problem? Incrementally, yes.
Is it rational, right, and legitimate to do so? Well according to some yes, others no.
The US government, and the current neoconservative cabal is anticonservative in the cpaital markets in ways that no other group has been in American history.
Without commodities in my portfolio, I believe strongly that great wave of inflation currently hitting our economy would prevent me from ever retiring, or preserving my wealth.
If the worlds average Joe is the one bearing the cost, well, diversify your portfolio friend.
Unhappy about the price of gas? Buy oil/gas stocks with good growth profiles: DVN, CNQ, and PWE are a few of my favorites.
Face it...the world is limited in its natural resources, whether that be food (of any kind), water, or energy. The planet at some point just can no longer support a growing global market for its natural resources, and with the rise in prices of all commodities, I'm afraid that this is what we are seeing.
I'm also afraid the only true solution is a harsh one: a sharp reduction in the global population and/or a sharp decline the economies of all these emerging economies (or a rise in the number of impoverished nations). The world just cannot support growth in the economies for everyone AND low commodity prices - it just isn't possible. In this worst case scenario, if this trend continues as it has, I fear it will result in serious conflicts for resources amongst the nations of the world, with the end result being armageddon to the human race.
You go first.
Speculators were not invented in the last 100 years. The process of price discover goes much further back than that. I would argue that the Government should work against markets getting "cornered" but other than illegal short term manipulation, the government has no business telling the market what the "right" prices are. If ETF's accellerate this price discovery, allow me to get some hedge against inflation and sends signals around the world about the money to be made by planting certain crops, developing promising new energy sources, re-engineering products to protect gross margins and a message to Central Banks about how we feel about their potentially inflationary policies....well, I'm not sure I see what the problem is.
Economic dislocation will be the result. No denying it. Buggy whip makers, mainframe computer manufacturers and coal miners in England offer just a few well known examples of economic dislocation that happened well before commodity ETF's came on the scene.
Like many others have stated, if the price is "wrong", profit from it! Then you can give those profits from your abilities to each according to his needs.
Shortages drive prices higher which spurs production and reduces demand which drives prices lower.
The problem now is it's harder to boost production of many commodities, but high prices will pay for research, development, and marketing of replacements(like solar for coal, algae-derived fuel for diesel, etc.), and will spur people to find alternatives or modify their consumption. If we "fix" these high prices instead of letting the market provide solutions, we should get used to permanent shortages.
First, about deliveries through futures. Historically, only 2%-3% of futures trades are settled by delivery. In the vast majority of cases, futures trades are offset (bought or sold) before a delivery occurs.
Second, futures market making doesn't follow the securities model. Securities market makers are obliged to maintain two-way (bid/offer) quotes in their designated securities. Not so in futures. As a "local," I can bid, and bid ONLY, for contracts without an obligation to offer out any contracts.
Last, if commodity-based ETFs and ETNs are blamed for adding speculative pressure on the upside, some balance might be acheived by floating "short" or "bearish" commodity index products which have the potential to augment short open interest. Short products have other utilities as well as pointed out in the HAI feature "Where Are The Short Funds?" www.hardassetsinvestor....
They are going to want what you have: bigger house, new car, stainless steel toaster, air conditioning, etc. Even with a recession,
nothing can change the math in the long run.
Thanks for so open-minded! That kind of a stupid reply really points out just how unintelligent you must be. Pity your parents didn't go first before you were born!
Sliv is correct in that there aren't enough resources for everyone. But won't the spiraling cost of commodities eventually curb the population?
There are a lot of articles mentioning the "problem" of high commodity prices. But don't those prices help solve the problems of overconsumption, pollution, overpopulation, etc.?
At least this article points out that bad fiscal policy is pushing more money into commodities instead of blaming speculators.
This repeal is coming.
On the issue of taking the opposite side if prices are too high, that suggestion is lacking in merit. Prices can go up on speculation for a long time due to greed. How else do you explain the housing crisis? The real problem is knowing if it is demand or speculation driving the price and when it will stop. There are too many people trading for profit instead of investing so speculation moves in a wave from one trend to another.