Book contents
- Frontmatter
- Contents
- Foreword
- Acknowledgments
- 1 The Revenge of the Old Economy
- 2 A Twenty-First-Century Supercycle? Long-Term Trends in Metal and Energy Prices
- 3 Volatility in Global Food Markets
- 4 Commodity Markets and Financial Speculation
- 5 The Implications of Oil Prices for the U.S. Economy and Lessons Learned from the 2011 Strategic Petroleum Reserve Release
- 6 The Gold Standard as an Alternative Monetary Regime
- 7 Conclusion
- Index
4 - Commodity Markets and Financial Speculation
Published online by Cambridge University Press: 05 October 2015
- Frontmatter
- Contents
- Foreword
- Acknowledgments
- 1 The Revenge of the Old Economy
- 2 A Twenty-First-Century Supercycle? Long-Term Trends in Metal and Energy Prices
- 3 Volatility in Global Food Markets
- 4 Commodity Markets and Financial Speculation
- 5 The Implications of Oil Prices for the U.S. Economy and Lessons Learned from the 2011 Strategic Petroleum Reserve Release
- 6 The Gold Standard as an Alternative Monetary Regime
- 7 Conclusion
- Index
Summary
The so-called financialization process that has occurred in commodities markets over the past three decades has given rise to intense public debate over whether the proliferation of commodity-backed securities and increasing presence of financial market participants has caused prices for these goods to rise and fall beyond their fair value, harming producers' and consumers' abilities to hedge their risks – the use for which forward grain markets were invented centuries ago – and hurting the businesses and consumers who would benefit from more stable, less unpredictable prices. The debate is a contentious one, and hardly new. For centuries, traders in commodity markets have raised suspicion among public officials and drawn the ire of consumers, who have questioned whether these market participants are playing a productive role or profiting at the expense of others. The launching of electronic futures trading and the proliferation of commodity-linked derivatives products over the past decade have intensified these concerns. It is true that broad, persistent increases in the prices of a host of commodities have occurred concurrently with a rise in commodity trading volumes and commodity holdings among investors. But is there a causal relationship between the two phenomena – in other words, are financial speculators pushing up prices? Or is the relationship between the two trends more nuanced and uncertain? The answer to these questions is critical for regulating energy markets and ensuring that market prices reflect fair value for producers and consumers alike.
A host of research explores the role and effect of financial speculators (that is, those who trade commodity-linked securities but do not produce, consume, or take delivery of the underlying good) on commodity prices. The lack of comprehensive, reliable data about the flow of goods and money within the world's commodity markets poses an enormous challenge to the ability of these studies to yield definitive conclusions. That said, some policy-relevant insights have emerged. There is little credible evidence that excessive financial speculation is systematically causing commodity prices to diverge significantly from what economic fundamentals would justify. Moreover, theoretical models and empirical data make clear the vital role that well-regulated speculation plays in commodity markets by enhancing price discovery, improving liquidity, allowing producers and consumers to hedge their market risk, and helping prices respond to fluctuations in supply, demand, and inventories.
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- Commodity Markets and the Global Economy , pp. 89 - 118Publisher: Cambridge University PressPrint publication year: 2015
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