By Don Miller
U.S. and European Union ((
)) 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
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
Contracts held by investors rose 12% this year through October,
and are 17% higher than in June 2008, according to data compiled by
The Wall Street Journal
[subscription required] from market regulator the Commodity Futures
Trading Commission ((CFTC)).
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,
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 & 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
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 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 Wednesday speech 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
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
"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
on the 2008 food crisis.
The European Commission (
) yesterday followed in the footsteps of the United States,
floating its own proposal to limit speculation in the markets,
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
"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
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,
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. (
), a mutual fund based in Overland Park, Kansas.
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