COMMODITIES SPECULATION / THE FINANCIAL TIMES LEX ( RECOMMENDED READING )

Commodities speculation

Published: August 3 2009 14:50

If you don’t like the facts, then find new ones. A year after six federal agencies asked their best and brightest to determine whether or not speculators were responsible for then-surging commodity prices, one senior US bureaucrat promised a “new and better report” this month. Though the Commodity Futures Trading Commission will not confirm his assertion that the study will overturn the original conclusion that speculators merely follow prices set by supply and demand, ongoing public hearings suggest as much.

Whether it is US congressional bills targeting “excessive speculation” or Gordon Brown, UK prime minister, and Nicolas Sarkozy, French president, inveighing against “damaging speculation,” there is a clear political imperative on both sides of the Atlantic to blunt the commodity rally.

The desirability of rising or falling asset prices is, of course, in the eye of the beholder. Plunging bank share prices were targeted by various short-selling bans last year, while the blinding surge in equities of the past five months is deemed healthy. By contrast, few tears were shed in the halls of power about the collapse in energy prices in the second half of 2008, when they dropped two thirds.

It seems likely that, at least in the US, it will soon become harder to hold large positions in commodity futures. This will complicate life for largely market-neutral swaps dealers, and push business to exchanges in Dubai and Singapore. What it will not do is repeal the law of supply and demand.

Still, politicians in countries rebounding from the worst recession since the 1930s can have a profound effect on commodity prices by taking an otherwise unpopular step – tapping on the brakes of monetary and fiscal stimulus. It is the phenomenon of too much money chasing too few goods, not nefarious traders, fuelling the boom in prices.

Copyright The Financial Times Limited 2009