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U.S. and European Union (EU) regulators are vowing to step up scrutiny on the size and volume of commodity market bets as debate continues to rage about whether excessive speculation is driving up prices on energy, metals and agricultural products.
In an unprecedented rush, investors have pushed a total of $121.2 billion into commodities since the beginning of 2009, according to Barclays Capital. Hedge funds, pension funds and mutual funds in the United States have boosted their positions on oil, silver, corn and wheat to record highs in 2010.
In some commodities, the number of futures contracts outstanding now far outpaces the numbers traded in mid-2008, when commodity market prices shattered records. As a result, regulators in the United States and Europe are considering proposals on how to prevent the so-called speculators from manipulating the markets.
Contracts held by investors rose 12% this year through October and are 17% higher than June 2008, according to data compiled by The Wall Street Journal from the Commodity Futures Trading Commission (CFTC), the market regulator.
Speculative investors now make up a significantly larger proportion of the market than they did in 2008 in several commodities, including the $200 billion crude oil market, The Journal reported.
Investors have boosted their bullish bets on crude oil by 24% since June 2008, and now control 16% of the market, up from 13% little more than two years ago. Bets in the copper market are up 58% and have climbed 52% for silver, according to the CFTC data.
Meanwhile, prices for commodities have surged to new records. Gold is up 29% this year hitting a record just this week. Copper is up 22% and trading near its record high of $4.0775 per pound. Oil busted through the psychologically important barrier of $90 on Tuesday and silver prices are at 30-year highs.
Regulators take a dim view of excessive speculation in commodities markets, arguing that it can distort prices and make it harder for producers and users of commodities to manage their risk. They say it also may negate fundamental investment factors like supply and demand.
Traders point out that there is no data to prove such activity can artificially inflate prices in the commodity markets.
The Dodd-Frank Wall Street Reform and Consumer Protection Act imposed a January deadline for the CFTC to set limits on how many commodity futures contracts in energy and metals a speculator can own. A similar regulation for agriculture markets must be in place by mid-April.
The agency has been collecting data on the over-the-counter market to piece together a framework for the new law, but has yet to announce a firm position on trading limits.
CFTC Chairman Gary Gensler has been pressuring other commission members to take a tough position on excessive speculation and told The Journal the position-limit plan could be considered at a meeting scheduled for Dec. 16.
"Speculative money from the likes of hedge funds, index funds and pension funds is coming into the commodity markets at a blistering pace," CFTC commissioner Bart Chilton said in a speech he made yesterday (Wednesday) at a conference in New York.
"If prices are skewed in a manner that is not fair by speculators, consumers can pay more than they should," he added, noting that while speculation may not drive up prices, it can distort them.
In 2008, riots broke out over food prices and the lack of available and affordable food. The United Nations Food and Agricultural Organization (FAO) estimates that in 2007, 75 million people were added to the 850 million already defined as under-nourished and food insecure.
"Amidst the food price crisis, speculation is a major contributor to extreme price volatility, which is skewing agriculture commodity markets to such a degree that both farmers and consumers are losing out," the Institute for Agriculture & Trade Policy said in a report on the 2008 food crisis.
The European Commission (EC) yesterday followed in the footsteps of the United States, floating its own proposal to limit speculation in the markets, The Journal reported. The proposal is among a number of measures springing from a review to tighten trading regulations under the Markets in Financial Instruments Directive (MiFID), the EU's main securities trading law.
"I don't think there's any reason why we Europeans should be less rigorous than the Americans," Michel Barnier, the EU commissioner in charge of financial regulation, said at a press conference.
Among other proposals the MiFID review will include an examination of so-called "dark pools," or trades executed outside the regulated markets, and high-frequency trading systems, where hedge funds and traders make money on tiny discrepancies between the prices of different securities.
The commission said it may require the trading platforms to be fully regulated under MiFID, have "robust risk controls" and automated "circuit breakers" to prevent trading algorithms from causing market crashes, The Journal reported.
High frequency trading was widely blamed for last May's "flash crash" which caused markets to suddenly tumble precipitously. But a report released in October by U.S. regulators blamed the slide on the sale of a large block of stock futures by Waddell & Reed Financial Inc. (NYSE: WDR), a mutual fund based in Overland Park, Kansas.
News & Related Story Links:
- The Wall Street Journal:
Investors Pile Into Commodities - Wikipedia:
Dodd-Frank Wall Street Reform and Consumer Protection Act - Institute for Agriculture & Trade Policy:
Commodities Market Speculation: The Risk to Food Security and Agriculture - Wall Street Journal:
EU Seeks Limits on Commodity Trading - Money Morning Archives:
Regulatory Reform
- Money Morning:
You Heard it Here First: Silver's 30-Year High is Just the Beginning
The story here is: "Governments want more control over everything." No exactly a news flash.
You can tell what's going on when they admit speculation "doesn't cause prices to rise," but "may distort prices." And they don't explain how that actually hurts anyone – but they want to stop the "distortion."
Here is the real concern: The EU and the USA governments know that as they continue to print money to finance their out-of-control spending, their currencies will continue to lose value. So people and institutions will want to put their money into something with some real value, like commodities. Soon people will be trading with those commodities instead of with the currencies. That would take the power away from the governments who control the currencies. So the only way that they can continue to control everything and everyone, is to keep people and institutions from using commodities as a currency. Thus the talk and planning by these governments about controlling the trading of commodities. This is scary stuff and most people have no idea what is about to hit the fan.
Excellent points! And the scenario described also explains why the government wants to gain complete control over the internet — because that is the mechanism through which people will trade commodities and conduct other bartering transactions.
Speculators aren't manipulating the markets. Markets set pricing, as they should. The real manipulators are Goldman Sachs, JP Morgan and the rest of the banksters.
What value does this massive speculation add to the system? These commodities fuel the economies of the world and all this massive speculation just sucks money out of the system and drives up prices and distorts the entire market. We seem to be saying market freedom at all costs even if it destroys the economic system! There is something very wrong with this picture!
Well said Jeff, "This is scary stuff and most people have no idea what is about to hit the fan."
Most of these folks will remain believers of prime time pundits, and gov. spokespersons, and remain in denial when faced with a truth that conflicts with their moral beliefs like "our government is good and trying to do the right things". California voters are a good example.
When the gov. blames "speculators" they mention hedge funds, not JPM or HSBC et al.
Since it IS the big pools of wealth that move these markets, I think limits are a good solution.
For example the US already had some limits – its simply a matter of unwinding the "special waivers" the gov. granted to certain players allowing them to exceed those limits.
Ted Butler is still optimistic that the CFTC will announce trading limits on silver futures, but if it doesn't, and kicks the can again, I would not surprised. In this case, as most of you know, the problem has been using a huge short position in a price suppression scheme.
It seems clear enough that our collective future is a very dark mine field, so it falls on us to individually plan a way to survive it.
It is very scary! What If, say China, India or another country with alot of U.S. monies and such, decided to install a gold or silver standard for their currency? What would happen to the other "toilet paper currencies"? I would like to read in my Email. Am I right or wrong?
Could this ever happen? Etc.
I am afraid that the CFTC will kick the can again. A low silver price makes the dollar look better.
So no regulation to stop the silver price manipulation.
It is more likely that there will be some restrictions for hedge funds and other speculators.
The TBTF JPM et al are sacred, they are doing uncle sams bidding!
Journaliist Don Miller was not specific . It is right that posistions limits are needed . Commissioner Bart Chilto said on Dec 9th that in oil there is 1 trader that has contracts of 20% in oil and 1 trader had 40% in silver. In oil it is speculation that the price is going up . In silver it is naked shorts to keep the price down. It is only now that JPM is trying to cover these shorts . For that reason the price of silver has gone up from 18.00 in August to 28.50 to-day . When position limits are in place silver and gold will reach their true value
Buy Silver now!