The speculation scapegoat

May 4, 2011 06:51 AM

There has been a debate raging for more than three years as to the role of speculators in the ongoing bull market in commodities. It hit a head in 2008 when crude oil spiked to $147, subsided during the credit crisis and is back with us in force.

Henry Jarecki, chairman of Gresham Investment Management, a long-time figure in both cash and futures metals markets and the subject of our May cover story gave a lecture in April at Georgetown University titled, “The Relationship Between Commodity Futures Trading and PhysicalCommodity Prices.” 

Jarecki has made his views known not only here but also testifying before the Commodity Futures Trading Commission (CFTC) on several occasions.

While Jarecki definitely has skin in the game — managing a long-only commodity strategy fund — he also has vast experience in both the physical and futures world and understands their dynamics better than most.

He points out that “the dollar values of the world’s physical commodity markets are, in every commodity, many times larger than the value of the associated open interest of futures markets (see table).


As one who has seen arguments on both sides and has observed some pretty specious arguments, I would urge those who truly want to understand the subject to read Jarecki’s piece.

The disconnect of those who would blame speculators, whether making an honest argument or simply reacting to populous demand, is in equating holding derivatives with actual physicals.

Jarecki writes, “one of the reasons it was so easy for the public to believe that commodity investors were responsible for increasing physical prices is that the argument relies on the public’s perception that in the physical world buying pressure inevitably causes price increases. To bolster this, the “impose limits and thus lower prices” forces utilized terminology that confused buying futures with buying physical commodities, and confused a demand for futures contracts with a demand for actual goods.”

 There has been a long debate on the subject of whether speculators, and more specifically long-only index funds,  are to blame for higher commodity prices. There has also been a lot of recommendations to address it but even those who support that argument would not argue that other factors play a definite role in price. Tangible real factors like a significantly weaker dollar, increased demand from emerging economies and a reliance on sources of energy from regions where ongoing supply is at risk from war and civil unrest. As noted here before, why aren’t we seeing the same energy put forth to address these known factors.

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.