Volatile Commodity Prices – Are Speculators at Fault?
By Ron DeLegge, Editor
December 1, 2009

SAN DIEGO (ETFguide.com) – After touching highs of around $150 per barrel last year, crude oil prices have since dropped to today’s $80 level. How do we explain crude’s rapid ascent and subsequent fall? Who’s to blame for volatile commodity prices?

It depends who you ask.

According to certain observers, sky high oil prices have nothing to do with below average inventories or supply outages in the Middle East and Nigeria.

What about global demand from emerging mega-markets like China and India driving oil prices to higher platitudes?

There’s no connection.

And if you think crude oil’s run is related to a weak U.S. dollar, you’re also wrong.

Who are the culprits behind erratic commodity prices?

For the answer, just ask U.S. Senator Byron Dorgan (D-ND).

He knows what makes the complex commodities markets go up and down, especially up.

“Speculators are using money they don’t have to buy oil they’ll never use, making money on both ends, and the American public gets stuck with the bill every time we fill up our tank.”

In June, Dorgan introduced legislation called the “End Oil Speculation Act of 2008” which calls on the Commodity Futures Trading Commission (CFTC) to use its emergency authority to crack down on speculators who Dorgan says, are “engaging in excessive speculation.”

What a revealingly novel thought.

For those of you keeping score, Dorgan has Bachelor’s degree from the University of North Dakota and an MBA from the University of Denver. He can now add commodities trading, with a Ph.D. in the oil market, to his resume of achievements. If you’re not satisfied with Dorgan’s stupendous explanation of why commodity prices are chewing a hole in your pant pockets, perhaps the answers provided by Sen. Joe Lieberman of Connecticut will clear the fog.  

Last year Lieberman made the brilliant suggestion that pension funds and other large investors should be banned from investing in commodities altogether. After stiff opposition and possibly recognizing that he had grossly miscalculated, he later recanted.

Where does he get such original ideas?

It’s hard to say, but Lieberman did receive a law degree from Yale Law School in 1967. I’m not 100 percent certain if commodities were part of the curriculum, but if Lieberman knows everything there is to know about the law, and you’d be a fool to think he doesn’t, he must know something about commodities. At the very least, he’s consumed a piece of bread, filled a tank of gas, and cracked an eggshell or two.

Other critics, mostly those with law degrees working for the government, share similar views with our fore mentioned commodity scholars.

“Pension retirement funds, index funds, and speculators are to blame for sky high commodity prices.”
 
Never mind that most of these ‘speculators’ almost never take physical delivery of the commodities they’re investing in because they replace expiring futures contracts with ones further out into the future. How do you manipulate a market without nefariously reducing supply?

Regulators and lawmakers have done a wonderful job of perpetrating the misinformed view that speculators are making fast and easy money at the public’s expense.

In truth, the art of speculating is a loser’s game in which billions, maybe trillions are routinely demolished due to ill-timed bets and failed hunches.

If you think speculating is such easy money, you should try it sometime and see how you make out. There’s a good chance you’ll end up mutilating a small fortune – just like most speculators.

Two of the largest diversified commodity index ETFs in the U.S., the iShares S&P GSCI Commodity Indexed Trust (NYSEArca: GSG) and the PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC), have collective assets of $5.47 billion.

There’s no denying these are significant amounts of capital invested in commodities, but it’s hardly enough to rig and distort a market. 

Are these the real culprits for out-of-control commodity prices?

Should pension funds along with other investors that use commodity index funds as a hedge against long-term inflation be penalized with new regulation? Is that the right answer to reducing the inflationary pressures of rising commodity prices?

Billionaire George Soros, the airline industry and the International Monetary Fund all think so. 

Forget about the real life causes, complex factors and other mitigating reasons for unstable commodity prices. None of it matters.

The wise guys already have it all figured out.

They know best.

And they also know who to scapegoat for sky high commodities: Anything and anyone but themselves.