Is Speculation Driving Commodity Prices?

 

I certainly believe speculation is driving commodity prices to some extent.  For example, ETF demand for gold represented 10% in the first quarter, up from 0% at the beginning of the decade.  However, I just don't know by how much.

What is fascinating, however, is that non-traded commodities have generally outperformed traded commodities. 

From Econbrowser:

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Those arguing that rising prices are not driven by speculation, point to supply and demand fundamentals of the producing and consuming entities themselves.  However, this ignores the fact that some commodity companies may themselves be speculating in their own products.

For example, many gold companies did not and still do not hedge their production specifically because they believe that gold prices are going higher.  When Rob McEwen, CEO of US Gold (UXG), was CEO of Goldcorp (GG), he floated a secondary and used some of the proceeds to buy physical gold!

Comments

[Calvin C.:]

Short & to the point. Thank you for the insight!

2008 Jun 03 07:35 PM

[ussmls7:]

I follow many writeing about Gold/Silver prices, also supply side of both, all that I have read, Silver is way under priced,just from data & demand delieverly lag time, to much noise accross the board,makes me wonder who,has the truth?

2008 Jun 04 08:46 AM

[Bear Stocks...:]

Instead of buying a pure gold or silver ETF, consider investing in SPDR Metals & Minerals (XME). For an even more diversified approach, buy GSP or DBC.

2008 Jun 04 09:40 AM

[CaptBob:]

Speculating in gold, or silver is not about taking delivery of a vault full of gold, unless you're a jewelry manufacturer who wants to lock in todays prices--(hedge against increases).
It's about seeing the truth of the dollars value and parking it in something with "real intrinsic" value under it, not "faith".
And while you're at it why not some leverage?, if you truly believe.

2008 Jun 04 11:22 AM

[NOWHEREMAN:]

Of course speculation helps, but the levels of stock on hand are not especially high and Central Banks have seen sales disappear rather quickly without an appreciable dent in appreciation.

2008 Jun 04 11:44 AM

[User 150045:]

Good point, succintly made.

2008 Jun 04 11:58 AM