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Will Federal Regulators Crack Down on Oil Speculation?

Why commodities prices are rising

It is not just the act of speculation that is causing prices to set record highs on petroleum, grains, gold and other commodities. Speculation provides liquidity in the futures markets. Who else would be there to sell to the commercial buyers who need to hedge their business needs? It was the introduction of ETFs (exchange-traded funds in “commodity futures”) in 2002, with the introduction of the gold ETF, that set us on this path of straight-up prices.

ETF traders are one-way (buy and hold) stock traders, which differ greatly from commodity traders. Commodity traders in the futures markets buy to get long when they think prices will rise in the future; and most importantly, they sell to get short when they think the prices are headed lower due to supply and demand. There is always a group of commodity traders that think prices are too high and will fall in the future, balanced against a group that think prices will go higher. These two groups create some degree of equilibrium in the markets. Now that there are ETFs in these markets, the number of buyers far outweigh the number of sellers; thereby giving the bias to the upside, because ETF traders typically don’t sell short. There is a small contingent of ETF traders that sell to get short, but the vast majority of people trading ETFs buy to get long and hold that stock forever. So equilibrium in the trading and price of commodities is skewed to rise unless something is done.

My suggestion is to look at ETFs in commodities as a bad idea, and get rid of them. There are national security safeguards in stable commodity markets. If we eliminated these exotic ETFs, the prices of petroleum, grains and, yes, even gold, will plummet to supply-and-demand-driven levels.

I have been trading futures for twenty-nine years. There is much more to this.

Sam DeNardo

Chicago, IL

Mar 9 2011 - 6:27am

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