COMMODITIES DAILY : SPECTRES OF SPECULATION / THE FINANCIAL TIMES ( RECOMMENDED READING )

Commodities daily: Spectres of speculation

By Javier Blas

Published: January 28 2011 10:30

As President Nicolas Sarkozy tours the World Economic Forum in Davos drumming support for its plan to curb speculation in commodities markets – in his words, “regulation. Not an excess ... but regulation” – the European Commission was putting the final touches to a report saying that speculators are not the problem.


The report ‘Tackling the Challenges in Commodity Markets and on Raw Materials’ was due to be published this week, but now it has been postponed.


No reason has been given.


But a draft copy of the report has made its way to commodities trading desks in London and Geneva and banks, exchanges and hedge funds and delighted with it.


The draft report acknowledges that “commodities markets have become more closely linked to financial markets” over the past few years. And says that “price movements across different commodity markets have become more closely related”.


But it points mostly to supply and demand factors, rather than the evil hand of the speculators that Mr Sarkozy was talking about in Davos.


At the same time the French presidency of the G20 has made commodities and food security a top priority, the European Commission believes that “there is little evidence that the price formation process on commodity markets has changed in recent years with the growing importance of derivatives markets”. The draft reports adds: “Empirical studies do not find any systematic evidence of a correlation between the substantial increase in index fund positions and commodity futures prices”.


Furthermore, it says: “While there is strong correlation between positions on derivatives markets and spot prices, there is no conclusive evidence on the causality between speculation in derivatives markets and excessive volatility and prices increases in the underlying physical markets.”


The analysis is not surprising. The Brussels conclusion matches, almost exactly, every other study – by the OECD, the International Monetary Fund, the US Federal Reserve, the Bank of England, the US federal commodities regulator and most academics.


But it is significant because it is at odds not only with Mr Sarkozy’s position, but also with some statements by senior officials in Brussels.


As the French President spoke in Davos, Michel Barnier, the top European Union official in charge of tougher rules for trading and a former French minister, pledged limits on speculation in food commodities in Brussels. “I find speculation in agricultural commodities where it exists to be scandalous.”


Interestingly Mr Barnier referred to speculation “where it exists”. Reading the draft report by his own experts, maybe he realises that, after all, it does not exist.


Copyright The Financial Times Limited 2011