The following is my reply to a few posters in a financial forum regarding speculative traders in the commodities markets:
Last year, the CFTC completed a major study of futures exchanges and commodities and found the following:
1) Speculative positions were LOWER in 2008 than in 2006 as a percentage of the total Open Interest. The presence and influence of speculators was LOWER in 2008, not higher! Since speculators are usually the first ones to see overbought prices, and thus SHORT the market, their sparse presence was likely one of the reasons why hedgers drove prices to such extreme levels. It was the ABSENCE of speculators that drove prices higher, NOT their presence!
2) Speculative positions in commodities were EVENLY divided between longs and shorts. How could speculative traders drive prices higher if they were evenly split between longs and shorts? Impossible! In fact, that's the way it is designed. Speculators, by design MUST reverse their positions to exit their trades. Only hedgers can take a long position and ride it all the way to delivery. Forcing speculators to take delivery would make this WORSE because there would be fewer and fewer off-setting short trades! Hedgers who were taking delivery represented the vast majority of LONG positions.
3) Speculators represented only 16-18% of the total Open Interest, depending upon the individual commodity involved. It would be impossible for such a small minority to control or manipulate prices.
4) NON-exchange traded commodities prices rose HIGHER, FASTER than the exchange-traded commodities. The existence of speculators in the commodity futures had the influence of DAMPENING and SUPPRESSING prices, NOT driving them higher. The larger and more liquid a market is, the better. More liquidity protects all market participants from manipulation by the few, the powerful, and the BIG. (Remember the Hunt Bros. manipulation of silver markets, until enough participants entered to crush prices.) Fewer participants reduces liquidity and makes it easier for the Blue Whales in the market to throw their weight around.
5) As more and more pension funds (CALPERS, for example) and ETFs have begun to SHORT commodities, this has the effect of adding more liquidity and keeping prices in check!
In the fervor of anti-free-market diatribes, the main stream news media has erroneously tried to paint traders as the villains in this crisis. They are an easy and defenseless target for populist sentiment. The main stream media has consistently been pro-socialism and anti-freedom. Listening to their tirades against freedom should only increase our fervor to protect these markets that have functioned extremely well.
Seeing the futures exchanges collapse would return us to the pre-futures era, when prices fluctuated to such extremes that many commodities would be worthless at times, and at other times, prices would be so sky-high that the shortages made them IMPOSSIBLE to obtain. This made supplies lower and prices higher because the providers/growers of the commodities couldn't count on prices that would provide them with a fair return on their investments. Despite last year's price extremes, that was NOTHING compared to the wild price swings that dominated commodities markets before the futures exchanges smoothed them out.
Be careful what you wish for. Things will be much WORSE... if you get it! You can look forward to long lines at the gas pump IF gas is available at all, and shortages of basic staples in the grocery stores. And in all cases, prices would absolutely be MUCH higher because there would be fewer supplies. No one wants that!
Last year, the CFTC completed a major study of futures exchanges and commodities and found the following:
1) Speculative positions were LOWER in 2008 than in 2006 as a percentage of the total Open Interest. The presence and influence of speculators was LOWER in 2008, not higher! Since speculators are usually the first ones to see overbought prices, and thus SHORT the market, their sparse presence was likely one of the reasons why hedgers drove prices to such extreme levels. It was the ABSENCE of speculators that drove prices higher, NOT their presence!
2) Speculative positions in commodities were EVENLY divided between longs and shorts. How could speculative traders drive prices higher if they were evenly split between longs and shorts? Impossible! In fact, that's the way it is designed. Speculators, by design MUST reverse their positions to exit their trades. Only hedgers can take a long position and ride it all the way to delivery. Forcing speculators to take delivery would make this WORSE because there would be fewer and fewer off-setting short trades! Hedgers who were taking delivery represented the vast majority of LONG positions.
3) Speculators represented only 16-18% of the total Open Interest, depending upon the individual commodity involved. It would be impossible for such a small minority to control or manipulate prices.
4) NON-exchange traded commodities prices rose HIGHER, FASTER than the exchange-traded commodities. The existence of speculators in the commodity futures had the influence of DAMPENING and SUPPRESSING prices, NOT driving them higher. The larger and more liquid a market is, the better. More liquidity protects all market participants from manipulation by the few, the powerful, and the BIG. (Remember the Hunt Bros. manipulation of silver markets, until enough participants entered to crush prices.) Fewer participants reduces liquidity and makes it easier for the Blue Whales in the market to throw their weight around.
5) As more and more pension funds (CALPERS, for example) and ETFs have begun to SHORT commodities, this has the effect of adding more liquidity and keeping prices in check!
In the fervor of anti-free-market diatribes, the main stream news media has erroneously tried to paint traders as the villains in this crisis. They are an easy and defenseless target for populist sentiment. The main stream media has consistently been pro-socialism and anti-freedom. Listening to their tirades against freedom should only increase our fervor to protect these markets that have functioned extremely well.
Seeing the futures exchanges collapse would return us to the pre-futures era, when prices fluctuated to such extremes that many commodities would be worthless at times, and at other times, prices would be so sky-high that the shortages made them IMPOSSIBLE to obtain. This made supplies lower and prices higher because the providers/growers of the commodities couldn't count on prices that would provide them with a fair return on their investments. Despite last year's price extremes, that was NOTHING compared to the wild price swings that dominated commodities markets before the futures exchanges smoothed them out.
Be careful what you wish for. Things will be much WORSE... if you get it! You can look forward to long lines at the gas pump IF gas is available at all, and shortages of basic staples in the grocery stores. And in all cases, prices would absolutely be MUCH higher because there would be fewer supplies. No one wants that!
