The Futures and Options Association (FOA) announces the findings of a report on speculation in commoditiesmarkets. The report “The impact of speculative trading in commodity markets – a review of the evidence”,which was compiled by the economic research group, FTI Consulting (FTI), constitutes a literature review ofthe evidence on market speculation and an investigation into the underlying arguments for and againstfinancial participation in commodity markets.
The report notes that speculation is one element of financial activity in commodity markets (which may alsoinclude portfolio hedging and investment diversification). FTI found little evidence to support the commonperception that speculation is a direct or major cause of long-term pricing trends but recommends that furtherwork should be undertaken to fully understand the complex interaction between financial and commoditymarkets. In addition, the report concluded:
- speculation is not a major cause of market volatility, but can amplify underlying price movements;
- the most critical reports accept that, at worst, speculation accounts for no more than 25% ofcommodity price movements in recent years, leading to the conclusion that 75% of such movementsare accepted by all parties as being generated by fundamental supply and demand problems;
- some reports cautioned that ill-informed regulatory action could increase market volatility,destabilise the price formation process and hamper the ability of physical producers and consumersto hedge risk, supporting the view that further work is required; and
- all reports emphasise the benefits of increased price transparency.
Anthony Belchambers, Chief Executive of the FOA said: “There is an inherent conflict between theunderstandable desire of governments, which are concerned with pricing outcomes in consumer-sensitivecommodities, and the role of market authorities, which are more concerned about the integrity of the priceformation process. This report emphasises the need for a balanced approach in recognising the key roleplayed by speculators in contributing to market liquidity and facilitating the risk management transactions ofreal economy enterprises – a capability that is critical in the current economic climate.”