Saturday, July 12

Futures speculation is the culprit behind high prices?

I wrote last week about futures and why we need them. You might want to read that first before reading this post if you havent done that already.

Anyway, here's an excellent article which nails the argument that its financial speculation using futures which is driving high prices. I will only paste 2 graphs which kill the argument. Enough said.

End of story.

Update: 20 July 2009: Another excellent post here on how trying to curb speculation does not work. Let me quote the end of their excellent post.

Over all, there is limited evidence that anything other than economic fundamentals is driving the recent run-up in commodity prices. The main driving factors in the energy markets include strong demand from China, India and other developing nations, a lack of growth in crude oil production and United States monetary policy. In the grain markets, driving factors are, in addition to monetary policy and demand from developing nations, the diversion of row crops to biofuel production and unfavorable weather that has hurt harvests.

The complex interplay of these factors and how they affect commodity prices is often difficult to grasp immediately, and speculators are a convenient scapegoat for the public’s frustration with rising prices. That’s unfortunate because curbing speculation — and hobbling the ability of businesses that rely on futures markets to reduce their risk — is counterproductive.

Regulation of commodity futures markets is at an important crossroads. Have we learned from our mistakes, or will we repeat them?

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