From the June 01, 2011 issue of Futures Magazine • Subscribe!

The spec limit debate

Prior to the debt markets seizing up, the Bear Stearns bailout, the lack of a Lehman Brothers bailout, TARP, and all the myriad fallout from the credit crisis which led to the deepest and longest recession in a generation, there was deep concern over rising commodity prices. Specifically, the spike in crude oil in the summer of 2008 — up to $147 — led to public outcry and demands for investigations.

As in the past, politicians, analysts and certain market gurus sought out scapegoats, including a favorite in times like these, speculators. This time was different as nearly concurrently with the substantial rise in commodity price, a new player joined the market — the long-only commodity investor.

At the beginning of this century we began to see growth in products that tracked commodity indexes. The Goldman Sachs Commodity Index, or GSCI (now the S&P GSCI), was the most popular, but there were others, including the Dow Jones AIG Commodity index (now Dow Jones UBS Commodity Index) and the Rogers International Commodity Index. These indexes track the performance of a basket of commodities in a rules-based process and were made investable to institutional and retail investors looking to allocate a portion of their portfolio to commodities.


Monies in these funds were invested either directly in the futures markets or in the swaps markets, with the swap market intermediaries eventually using futures to hedge the exposure they provided to the fund.

Commodities, which always have been viewed as a hedge against inflation, entered a bull market at the turn of the century and, with deficits growing throughout the last decade and the value of the U.S. dollar falling precipitously, many investors were looking for such a hedge.

In addition to funds tracking these indexes were exchange-traded funds on individual commodities, such as crude oil, gold and silver. This may have heightened suspicion as one of the charges made against these investments is that they were basically hoarding commodities, forcing prices higher unrelated to the underlying fundamentals. While the argument of hoarding doesn’t hold a lot of water with funds that roll futures positions at the beginning of the month preceding expiration, some of the ETFs actually held the physical commodity backing the investment.

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