my post on Zero Hedge this morning:
I guarantee that will cause HIGHER prices, not lower ones. Speculation is not the root cause; it is a symptom of problem, not the root cause. If you hack at the branches (speculators), the root cause (Fed's easy money) remains intact. History shows that by shrinking the size and liquidity of the market, it also shrinks the supply. This eventually results in HIGHER prices. Hugo Chavez has tampered endlessly with attempts to lower food prices in Venezuela, but supplies keep shrinking and prices keep going higher. The antidote to speculative influence is to increase the size and liqudity of the market, not shrink it.
The Hunt Bros' attempt to corner the silver market was a good example. When the market was small, their wealth could easily manipulate the market. But as prices rose, more and more people entered the market. Even housewives were selling their silver at pawn shops. But as the market size and liquidity rose, the Hunts lost control and the market crashed.
History shows that speculators are among the first to perceive an overbougght market and short it. CFTC and other studies have also repeatedly shown that speculators FOLLOW the market, not lead it. CFTC studies have also repeatedly shown that speculators constitute only about 12-18% of total trading volume, even during the commodity boom of 2008. In fact, CFTC studies showed that speculative trading during 2008 was LESS than during 2006, when commodity prices were supressed, as a percentage of total open interest. Studies have also repeatedly shown that non-exchange traded commodity prices rise HIGHER than non-futures traded commodities. If the presence of speculative funds were the real cause, this would not be the case. Those who blame speculators for high prices also forget that by necessity, speculators MUST offset their positions with an opposing position in order to exit the market and take profits. Hedgers don't because they take physical possession. Thus, by definition, speculators negate their effect on the market when they exit their positions. They have no choice! They have to!
The true net cause of high commodity prices is still the Fed's easy money policies that buoy up all risk assets. As long as the Fed is ramping up the stock market, commodity prices will too! Fed policy doesn't just increase the supply of funds. It is also suppressing interest rates that would otherwise give investors a viable alternative and reasonable returns. By denying investors these reasonable returns, it forces them to buy more speculative assets like commodities in order to try to preserve the value of their capital in an inflationary, dollar devaluative environment. Fed policies literally feed the inflationary monster by incentivizing risk assets more than would otherwise be warranted.
By shrinking the size and liquidity of commodities markets, we shoot ourselves in the foot because large investors -- the blue whales of the investment world -- will have GREATER influence on markets, and they will simply move their funds to other commodities exchanges in other countries, where their money is welcome. This thus causes capital flight, thus devaluing the Dollar even more, and thus amplifying the very effect that caused prices to rise in the first place. A blue whale has a lot more influence in a fish pond than the Pacific Ocean. It's the same in the financial markets. The larger and more liquid the market, the less influence the blue whale has. Limiting the market size and participation will drive prices HIGHER, not lower.
These are only a few of the reasons why all attempts to control prices by controlling markets lead to HIGHER prices, not lower ones!
The Hunt Bros' attempt to corner the silver market was a good example. When the market was small, their wealth could easily manipulate the market. But as prices rose, more and more people entered the market. Even housewives were selling their silver at pawn shops. But as the market size and liquidity rose, the Hunts lost control and the market crashed.
History shows that speculators are among the first to perceive an overbougght market and short it. CFTC and other studies have also repeatedly shown that speculators FOLLOW the market, not lead it. CFTC studies have also repeatedly shown that speculators constitute only about 12-18% of total trading volume, even during the commodity boom of 2008. In fact, CFTC studies showed that speculative trading during 2008 was LESS than during 2006, when commodity prices were supressed, as a percentage of total open interest. Studies have also repeatedly shown that non-exchange traded commodity prices rise HIGHER than non-futures traded commodities. If the presence of speculative funds were the real cause, this would not be the case. Those who blame speculators for high prices also forget that by necessity, speculators MUST offset their positions with an opposing position in order to exit the market and take profits. Hedgers don't because they take physical possession. Thus, by definition, speculators negate their effect on the market when they exit their positions. They have no choice! They have to!
The true net cause of high commodity prices is still the Fed's easy money policies that buoy up all risk assets. As long as the Fed is ramping up the stock market, commodity prices will too! Fed policy doesn't just increase the supply of funds. It is also suppressing interest rates that would otherwise give investors a viable alternative and reasonable returns. By denying investors these reasonable returns, it forces them to buy more speculative assets like commodities in order to try to preserve the value of their capital in an inflationary, dollar devaluative environment. Fed policies literally feed the inflationary monster by incentivizing risk assets more than would otherwise be warranted.
By shrinking the size and liquidity of commodities markets, we shoot ourselves in the foot because large investors -- the blue whales of the investment world -- will have GREATER influence on markets, and they will simply move their funds to other commodities exchanges in other countries, where their money is welcome. This thus causes capital flight, thus devaluing the Dollar even more, and thus amplifying the very effect that caused prices to rise in the first place. A blue whale has a lot more influence in a fish pond than the Pacific Ocean. It's the same in the financial markets. The larger and more liquid the market, the less influence the blue whale has. Limiting the market size and participation will drive prices HIGHER, not lower.
These are only a few of the reasons why all attempts to control prices by controlling markets lead to HIGHER prices, not lower ones!
