Thursday, May 20, 2010

In many commodity markets the speculators are the market

Niels C. Jensen points out that commodity markets have changed significantly in the past decade and a half. Once they were used by producers and consumers to hedge their businesses. Now they are traded by people having no basic interest in the commodity.
Many commodity markets are surprisingly small and index linked products such as ETPs have become a larger and larger proportion of the market. As a result, commodities have increasingly become financial rather than real assets – a fact which is still lost by many investors. (As I learned many moons ago, if you are the market, you are in trouble!) [The accompanying chart] illustrates the ratio between physical and financial futures contracts in the crude oil markets. Over the past 15 years, financial futures have grown from 2 times the size of physical markets to almost 12 times the size.

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