Question: Should people be allowed to invest in commodities?

I pose this as a question, instead of a poll, because I would like to see some discussion on this. Also, if it were a poll, it would be a slanted one, as I have an opinion.

So, the long form of the question is this: Should commodities, such as oil, natural gas, corn, wheat, soybeans, and other commodities that are of vital interest to the world be subject to price manipulation, through investor speculation?

However, there should be stringent regulation to prevent abuse of speculation.

Speculation is the major reason oil is so low. Use has not dropped that much. I think it will go back over $100 soon. Maybe by March '09.

When you get the supply and demand curves out of whack with any commodity, you get wild changes in pricing.

The supply and demand for oil has been relatively stable by any reasonable measure. Its not like some new automobile that runs off of water has been introduced.

During the 1970s oil was trading at $2.50 per BARREL. Less than 7 months ago it was at $147 per barrel. Today it is hovering around $56 dollars. You call this stable? Did we have some holocaust that 1/3rd of the world energy consuming population died and I didnt hear about it?! It was all speculation bullshit that raped the middle and lower class in the world because we share the burden of spending nearly all of what little we make on needs.

The fact is it doesn't add up and speculation has not helped anyone but the rich who profited from their investments, while those of lesser means worldwide have gotten screwed.

My point is that actual supply and demand have not flucuated enough to justify the price volatility in the last few months or years. I suggest the following remedies: increase the oil inventory, regulate speculation.

Needing regulation of speculation, not simply ridding the market place of it

Actualy supply and demand has not fluctuated enough to justify the price swings we have seen over the past few years

I think the market will settle around $70 a barrel and be a decent indicator of aggregate demand.
I would like to see the oil inventory increased, but we do not have any way of doing so. OPEC won't increase their pumping output any time in the forseeable future because its not in their best interests.

it is entirely possible to store more oil here in the US. Might require some government funding of storage facilities.

Needing regulation of speculation, not simply ridding the market place of it

Actualy supply and demand has not fluctuated enough to justify the price swings we have seen over the past few years

I think the market will settle around $70 a barrel and be a decent indicator of aggregate demand.
I would like to see the oil inventory increased, but we do not have any way of doing so. OPEC won't increase their pumping output any time in the forseeable future because its not in their best interests.

The increased demand from the developing world (mostly India and China) means that oil will never go back to the price it was in the 1990's because supply can't keep up. The price is artificially inflated because monopolies and oligopolies (oil is basically an oligopoly industry) don't produce at maximum capacity because it's more profitable to produce less and charge more for it. On the other hand, that's a good thing long term because higher prices mean more time and incentives to develop alternatives before we deplete the oil reserves.

But the rapid shifts are largely speculation. Speculation comes from a lot of things, some of them economic and some of them political. Whenever Bush gave an indicator that we might go to war with Iran, oil prices went up. Whenever Hugo Chavez threatens to cut off oil to the US, prices go up.

couldn't keep up? I saw no evidence (other than investor speculation) that this was actually the case.

OPEC collapsed in the 1980's due to the Iran/Iraq War and it continued to be a weak force until the late 90's. But now that OPEC is again becoming an effective cartel and international demand is on the rise, they can allow demand to outpace supply.

Add to that the fact that the United States consumes 1/4th of the world's oil and our domestic supplies have actually slowed down production because we're simply running out of places that we can dig holes and find oil.

I didn't read your posts above completely just scanned through them. We basically agree on supply and demand. However the role of speculation magnifies the price flucations in an unhealthy way imho.

And that is down from $120 or whatever the ridiculously inflated price was due to speculation. But a decade ago, oil was below $20 a barrel. Some of that disparity between $20 and $65 is due to inflation, but certainly the dollar hasn't inflated over 300% since 1998.

What you seem to be arguing, and I would agree, is that people can never get enough oil. The way I interpret that economically is that demand is always outpacing supply and therefore that factor is constantly increasing the price even though the net change in price may be negative due to other factors. However, I do think that there are periods where supply increases are close enough to demand increases that the price increases are marginal enough that people don't care very much.

Given the rise of China and OPEC's resurgence, both occurring about a decade ago, I think there is sufficient evidence to suggest that demand is outpacing supply at a quicker rate over the past decade than it was during the 80's and 90's and that is why we have $65 oil when you only factor in supply and demand instead of $20 oil like we used to.

But I admit that I'm not an expert on oil markets, so maybe there are other factors I am not considering.

I agree with you but with the caveat that futures trading by interests other than actual oil traders and buyers has magnified the effect on the price.

I think that $65 is close to where it naturally is without too much influence from futures trading since the futures traders were a lot more influential a few months ago than they are now.

But as far as futures trading goes, I really do question whether it should be allowed given that it is essentially gambling. Stocks and bonds have actual value but speculation is putting money on the probability of an event actually happening. The odds may be better than the casino pays out, but it's still gambling.

I am not sure, though, how sure we should be about the normal price. The whole futures/speculation thing clouds the picture.

If I had to pick a number between $20 and $65 I would say that the actual price is closer to $65 than $20. But that's about all I know.

Yes, they're reacting to news reports, but I don't think they should be allowed to control commodities prices based on fear. Commodities should be priced solely on supply and demand.

if people who do not intend to take delivery of a product are bidding up the price I do not see how the real demand is properly determined.

There is not enough inventory of gasoline in this country to smooth out the minor flucuations in supply and demand.

"demand outlook". The speculators are "projecting" that demand will go down. Not because demand IS going down.

People are truly driving less, thus suppressing demand. Vehicular deaths in this country have gone down a decent amount in the past year, specifically the past quarter significantly, due to less people on the roads. The speculators have been driven temporarily from the market because hedge funds have liquidated their assets as people try to get out before the market hits rock bottom

Not enough to cause oil to drop from $147 to $60. Current price of $60 based on "projected" use in January. If use doesn't drop to level in sync with $60 cost, price will go back up. I don't think speculators should be allowed to affect commodity prices. Pricing should be based on real demand. If demand goes up, speculators can benefit.

Its not like the pumps were running dry anywhere in the freakin world, lol. Less volatility is needed in all these commodity markets. Governments should play a role in regulating speculation and also in forecasting demand and supply and in stimulating the desired actions when necessary.

imho. THe speculators do not have direct information on inventories and other factors that will effect the future price and yet gobs of money is thrown into the market and creating volatility that is unwelcome by the producers the distributors and the consumers. Its just fucking ridiculous.

All it does is drive up prices for essential goods due to rampant speculation that is not conducive to a healthy economy at home or on a global scale. Look at the energy crisis. First OPEC told us oil was at $147 a barrel because of "increased demand from emerging markets like China and India." Ok, so where did all these billions of new energy consumers go all the sudden that oil is trading at a paltry $56 dollars per barrel? It was just an excuse for them to raise prices, helped by speculators looking to make a buck.

Another example why speculation on commodities was counterproductive to the public good was the rolling blackouts across California in the early Bush years due to Enron bidding up contracts on futures for energy, making it too expensive for local companies to afford. They single-handedly put millions of Californians in the dark, literally, while they profited hand-over-fist due to Phil Gramm's write-in law of commoditites modernization and the deregulation of the futures contracts.

Greed has led to this global recession and it wasn't just in real estate, or credit-default swaps. People need to wake up and realize what has been done to this country by the wealthy investors and CEOs

The farmer will have a thousand tons of sugar beets to sell when his crop comes in a few months from now. The going rate on sugar beets is pretty good right now, and he'd like to lock in that price just in case it goes down between now and harvest. So he offers his beets for sale now, but for future delivery.

Problem is, the sugar refiners aren't buying sugar beets right now. They are stocked up. They will need more in a few months, about the time the farmer's crop comes in, but they don't want to buy them that early and tie up that much cash in inventory. Besides, the price of sugar beets might go down in the next few months, and they might be able to get a bargain by waiting a while.

So who does the farmer sell his sugar beets to if the end user can spare the cash right now? Enter the speculator. His job is to absorb the risks of future price fluctuations, provide a liquid market when the farmer wants to sell his crop, and be ready with a supply of product when the end user is ready to buy.

The speculator takes a lot of risk, and expects to be paid well when his bets pay off. In exchange, he makes it possible for both the farmer and the end user to make more stable long-range plans concerning the buying and selling of their commodities. (Without cash in advance for his crop the farmer probably can't afford to hire pickers or buy diesel for his harvesters and his operation grinds to a halt while the crop rots in the ground.)

Without speculators the market in commodities would screech to a halt and farmers would have trouble marketing their commodities, and end user would have trouble buying them. To even suggest that speculators could be dispensed with exposes a lack of understanding of how markets for real commodities work.

having futures markets without allowing speculation? Just curious.

The purpose of commodities markets was originally for people involved in the industries in some way. But regulating and enforcing that is another matter.

My opinion is that these commodities are of such vital interest to the health of the world, that the prices of them should not be subject to wild speculation.

that allows farmers to borrow money to buy seed, feed, fertilizer, farm equipment, fuel, and provided money to live on since crops might only be harvested and sold once a year.

and there are probably ways to stabilize them. I was trying to ask whether you had any particular approach in mind.

One way would be to tax transactions. This has been proposed as a way of reducing currency speculation, although it's not my personal favorite.

It might be possible to require that an individual or corporation purchasing a commidities futures contract either be the buyer or seller of the underlying asset. This might eliminate certain legitimate non-specualtive purposes, and might actually destabilize the market under certain scenarios.

A holding period might be required without a substantial penalty (say, a 10% penalty would be imposed if the holding period is less than two months). Like some other proposals, this might have some difficulty being enforced internationally.

Another way might be to reduce or eliminate trading on margin. This would remove the profitability for speculators but retain the usefulness for farmers and other producers.

There are ways of avoiding all these and there are probably unintended consequences to all of them. I think trying to calm speculation is a good thing, but as always the devil is in the details.

Its just another instrument for monetary gain on something that doesnt need to be! The American way has become to make something from nothing. We dont produce goods anymore, we write contracts. There are enough of these instances to make money off intangible ideas, they need to stay out of necessities that affect if people can get to work every day, or if people have enough money to eat. We already have a global hunger crisis, we don't need speculation on grain or corn because some rich asshole thinks ethanol will be the wave of the future

"...they are designed as vehicles for hedging and risk management so that people can avoid “gambling” if that is not their choice. For example, a wheat farmer who plants a crop is, in effect, betting that the price of wheat won’t drop so low that the farmer would have been better off not planting at all. This bet is inherent to the farming business, but the farmer may prefer not to make it. The farmer can hedge this bet by selling a wheat futures contract. Futures markets can be used for both hedging and speculating.

http://www.cftc.gov/educationcenter/economicpurpose.html


But, not being an economist, I myself hesitate before stating whether we absolutely need or absolutely do not need one or another portion of the market... :shrug:

between what they were intended to do, and what actually happens now with them, are two completely differant things. The farmer aspect of this market is the commonly used anecdote why we need speculation and a futures market, but the truth is that farmers are probably the people who least are involved in this aspect of business. Most of farming is done by huge agri-business and needs no real 'hedging' of their profits. They get billions in subsidies from the government to ensure their survival and profitability regardless. They won't go out of business for lack of assurance, trust me. That is just an excuse for wealthy investors to profit in this unregulated markets, we know of this by Enron. Enron just happened to get caught. What has been going on just these past few years in this area of speculation is worse than the blackouts we saw from that energy scandal, maybe just more subtle however so less realize it. It is still a pillaging of those of modest means.

Two members of my extended family in TX are cattle ranchers, and they appear to use the futures markets as intended.

I myself don't understand why one would amputate an effective and efficient portion of the market due to abuse, rather than try to regulate and/or enforcement of regulations to prevent abuse.

just regulate it so people inside the business are using it as intended, not so some billionaire investor can drive prices up to make a quick buck. People without a stake in the outcome of the industry should not be allowed to write contracts to it that affect global food or energy prices.

It's just to easy to game the system the way it is set up.

But I do it the normal way of buying shares in a company or an ETF. I don't believe that hedge funds should be able to leverage themselves 30:1 in order to overpurchase equities of any kind, including commodities or options on commodities.

Gold is a commodity. Should we not be allowed to buy shares of mining stocks?

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It is a matter of choice. Judgement is required.

Keep the uninvolved speculators out. Let soybean farmers buy soybean futures, let hog farmers buy hog futures, keep daytraders out.

speculation is a scam to create profits out of thin air and to repress the lower and middle class by artificially inflating prices.