Chilton's evidence?

April 15, 2011 06:06 AM

During the Futures Industry Association’s annual conference in Boca Raton Fl. in March Commodity Futures Trading Commission commissioner Bart Chilton said that it just wasn’t true that that there was no empirical evidence that speculators in general and more specifically the presence of long-only commodity indexes were at least partially responsible for rising commodity prices.

In numerous Congressional hearings the leadership of CME Group and some industry leaders have consistently pointed out that there were no empirical studies linking high prices with speculation. They also pointed out that the CFTC’s own study in September 2008 seemed to indicate speculators were not the problem. A couple of years ago Chilton had promised a more in depth study from the agency on the matter that would indicate something different, but no such study has come forward.

So I asked Commissioner Chilton for some examples and he referred me to some of his speeches. I remember remarking to a colleague during Chilton’s remarks in Florida that I hope he wasn’t referring to a University of Rice study released last summer that was weak on evidence that we critiqued here but was more thoroughly debunked by Craig Pirrong, someone with much better economic credentials than I . Actually Pirrong went down the list attacking each reference.

Chilton did cite the Rice Study and a few others but more so relied on some opinion pieces and anecdotal evidence. Chilton has supported this theme for several years now and seems to switch on and off from hard sell to soft sell, with the overriding theme of, speculative long positions have grown dramatically while prices have risen dramatically and  we have to do something. But having to do something because the public is angry over high gas prices and politicians are looking for a scapegoat rarely results in good policy.

There are some very smart people that believe speculation is playing a role in higher commodity prices and we do know that the affect of passive long-only investment in commodity futures markets does affect price at least short-term and has affected spread relationships. There are some very affective traders taking advantage of the “Goldman Roll” and all those traders who are bear spreading in front of the roll. It has had an affect on calendar spreads and the market has adjusted. That is what markets do.

Here is what we also know. We know that commodities are priced in U.S. dollars and the historic drop in the value of the dollar plays a huge role in the price of commodities. We also know printing more dollars creates inflation. We know commodities have always been used as a hedge against inflation. We also know that there has been historic growth in China and India, which has led to increased demand for commodities. In terms of crude oil we know that a large portion of the world supply comes from a the Middle East, a very unstable place with an ongoing war in Iraq and potential civil conflicts in numerous oil producing countries. We also know that there are other places besides the U.S. futures markets to gain exposure to commodities.

So given what we know, instead of what some of us think they know, it would make sense to take action on — if some action is required — those factors that we know are affecting price.

 We have been fortunate at Futures to be able to speak to some very knowledgable folks on this matter since we instituted our monthly cover Q&A feature. See what they have to say on the matter.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.