Oil: Global GDP is still suffering and yet the price oil has risen from $34 to $72 a barrel. Copper, sugar and iron ore prices are also up strongly. Could this be a conspiracy of traders, speculators and investment banks? The UK’s Financial Services Authority is taking a look, following the lead of its US regulatory counterparts.
The debate is fierce. On one side is common sense. In effect, commodity funds and many speculators both chase and create market momentum. They tend to push prices up or down further than is justified by industrial supply and demand.
On the other side are articulate defenders of a profitable trading business and a mass of confusing data. Data can be found to demonstrate that “fundamentals” determine prices, especially if those fundamentals include financial conditions and producers’ expectations.
Regulators are mulling over various reforms. But the focus is on improved transparency. That might help prevent manipulation, but it is hard to corner markets that are mostly large and liquid. The witch-hunt for speculators won’t do much to alleviate price volatility. As long as commodity prices vary along with financial trends — up strongly when money is easy and down fast when credit is squeezed — these markets will attract interest from traders. Crack down on them in one place and a new lot will come up somewhere else.
There are two effective ways to reduce volatility in commodity prices, neither in the remit of market regulators. First, get rid of easy money. With low inflation, reasonably high and stable real interest rates and credit in fairly short supply, the financial winds wouldn’t blow strongly enough to retain the interest of speculators.
Second, rely less on spot and more on cost-base prices. Most commodities come out of mines and wells that last decades and go to customers who need a steady supply and would benefit from steady prices. But for the last few decades, prices have increasingly been set in volatile markets increasingly dominated by financial — not industrial — considerations. If a way can be found to reverse that trend, there will be no need to hunt out the witches of speculation.
