Jack Walker

Speculators Keep the Market Liquid

Frank,

Should more effort be make to distinguish between speculators and investors in the commodity markets?

We understand the important liquidity function provided by speculators, but using the term “Investor” in the commodity markets is an oxymoron since the short-term commodity price discovery function is incongruous with long- term investing.

Commodity markets were established for short-term price discovery not for long-term capital investment. Is there any wonder why futures contracts have a limited life span?

When long- term pension fund and endowment assets are allocated to commodity markets it shifts the demand curve upward to the right and if supply is constrained then the new equilibrium price point is higher than would be determined solely by the producers and uses of the commodity. The resulting distorted price signals send the wrong messages to both producers and users as they make enormous long-term capital allocation decisions.

Are we shifting the higher price level to society as a whole for the benefit of a smaller group of pension fund beneficiaries?

Perhaps the discussion goes beyond just setting position limits to examining the acceptable role of the market participants.

Should we be more concerned about matching long-term investment objectives with long-term capital requirements based on accurate fundamental data?

Jack