farmer448

Are Speculators Really That Bad for Commodities Markets?

Is there a role for speculators in the commodities markets?

Yes, their purpose is to provide liquidity. This allows prices to reflect longer term supply and demand imbalances and for lots of suppliers to adjust their production to the longer term pricing or for consumers to look for alternative materials or adjust their pricing of product.

Is there a role for regulation?

Yes, the problem is how to keep the market in a reasonable balance between suppliers and consumers of commodities. The supply side is “Cornering the Market” like the Hunts did with silver. In this case the enough of the supply of silver was controlled by the Hunts so they could set futures prices. The second is due to “herd mentality” of speculators. Here due to, loose/fast money, speculators start chasing a commodity price irregardless of the underlying demand of the price. The regulator, like an umpire, needs to be in place to make sure neither side is favored in the futures market and that the supplier or consumer does not have an overwhelming advantage.

Now supposedly the CFTC is supposed to be the umpire of the game. The problem is they are in the spectators box saying regulation is the responsibility of the “Great and all Powerful Invisible Hand”.

Yes, massive excesses will correct. But when this has happened in history the economic dislocation is incredible. Have the regulators learned nothing from history? Regulation is supposed to dampen excesses before the “Invisible Hand” corrects catastrophically.

Personally give me practical leadership over ideological leadership any day. I have enough drama in my life without our leaders dumping more on me.