Thursday, July 16, 2009

Derivatives trading causing price spikes? Study shows it's just hype.

Following up on our earlier post called Energy speculation vs. hedging - regulate it all, ask questions later, here is a recent study from the Fed that contradicts what some politicians are claiming - that somehow futures trading activity (or what they call "speculation") has a lasting impact on spot prices.

The author, George Korniotis analyzes industrial metals with and without the corresponding futures markets. The chart below from the paper shows the price growth rates for the two types of markets: "traded" and "non-traded".

Here is the summary:
...the results indicate that in recent years the relationship between futures and physical commodity markets for industrial metals was not disturbed by financial investors. Instead, commodity spot prices changes are driven by world economy activity and financial investors are merely responding to these price changes. This conclusion is strongly confirmed by the economic developments in 2008.
Rather than tackling the real issue, which is the US dependence on crude oil, politicians continue to blame derivatives markets for price spikes in energy. They also claim that the same problem exists in other commodities. Maybe they should take a sober look at the evidence to the contrary.

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