Commodity speculators: the advantages outweigh the disadvantages?

Speculators often get bad reviews, especially when headlines report stock crashes, soaring oil prices, or currency values ​​collapsing in the short term. This is because the media often confuses speculation with manipulation. Manipulation is fraudulent and unethical, and has repeatedly led to extensive economic losses; while speculation is risky for speculators, but it plays several important functions in maintaining the health of our market and economy. Especially the speculation in the commodity market, not only the financial market, but also the smooth operation of our supermarket shelves and food supply chain.

In this article, we will study the role of speculators in commodity markets.

Although they are often stigmatized, speculators actually occupy an important position in today’s market.

Key points

  • Speculators are risk-takers. They bet on the short- and medium-term future trends of an asset without any other shares in the asset.
  • Speculators provide liquidity to the market, help price discovery, and take risks that other market participants want to offload.
  • In the commodity market, speculators also maintain market efficiency and avoid shortages by raising commodities when prices fall and providing funds for intermediaries that connect the supply chain.

What is a speculator?

Speculators make money by buying and selling assets such as derivative contracts, which allow him/her to control assets such as commodities without having to deal with them directly. For example, commodity speculators do not arrange the shipment and storage of commodities under their control like hedgers. Instead, they just bet on price movements and close their positions before expiration.

This non-intervention has given speculators a false image of indifferent financiers jumping into markets they don’t care about in order to profit from producers—legislators have always claimed to defend this land. Rustic type. But this means that speculators have to take a lot of risk for themselves. If the price of wheat falls, long speculators will lose all value, and food producers who hedge by buying wheat futures will still benefit from buying cheaper physical wheat to make their products, despite the decline in the value of their futures. Therefore, speculators can stand up to earn a lot and lose a lot.

Avoid shortage

The most obvious function that people overlook when criticizing speculators is their ability to prevent shortages of certain commodities. Shortages are dangerous because they can cause price spikes or resource rationing. If drought cuts hay production in a given year by half, then it is natural to expect the price of hay in autumn to double. However, in broader economies of scale, these shortages are not easy to spot. This is why commodity speculators help focus on overall production, identify shortages, and move products to where they are needed (thus obtaining higher profits), through middlemen-middlemen who use futures contracts to control costs. In this sense, speculators act as financiers, allowing middlemen to keep supplies flowing around the world.

Therefore, speculators should not be confused with intermediaries or brokers. If we can only obtain the products we need or want from nearby products, our economy cannot grow too much. Normally, every product in your home has at least some components that require international voyages to get there. The intermediary’s mark-up instructions are used for the indirect costs of shipping, sorting, bagging, and displaying these products in stores near you, plus some profit, to keep the intermediary performing this function. This will ship maple syrup to Hawaii, Korean laptops to New York, and other products to destinations where higher profits can be achieved.

Speculators not only provide funds for middlemen, but also use futures to encourage inventories to cope with shortages, thereby affecting the prices of commodities, currencies, and other commodities. Just because we want cheap oil or mango does not mean that we should blame speculators when prices rise. More commonly, other factors such as OPEC and tropical hurricanes increase the risk of greater price volatility in the future, so speculators are raising prices now to smooth out possibly greater prices in the future. Higher prices suppress current demand, reduce consumption and encourage more resources-more people to grow mangoes or more oil exploration funds-to increase inventories. This price smoothing means that while you may not like to pay more for gasoline or mangoes, you can always find some.

When we leave the closed world of commodities and observe foreign exchange (forex), one of the largest markets in the world, we will see that speculators are essential to maintaining international trade and financial levels and preventing currency manipulation. The government is marked as some of the most blatant manipulators. The government hopes to have more funds to fund projects, and it also hopes to have a stable currency for international trade. These conflicting interests encourage the government to peg the national currency while at the same time exaggerating the true value to cover domestic expenditures. It is currency speculators who keep the government honest through short-selling and other methods, through the consequences of accelerating inflation policies.

Prevent manipulation

Although people may recognize the importance of speculators in preventing shortages and stabilizing prices, few people associate speculation with preventing manipulation-people mistakenly believe that speculators participate in very bad behavior. In a market where many different speculators participate, it is more difficult to achieve large-scale manipulation and it is much more expensive to try it (or even more costly in the event of failure). The abnormal price movements of copper and silver on Thursday are an example of continued manipulation and eventual collapse, as more and more market speculators enter opposing transactions, betting on abnormally high prices in a desperate market. To avoid market manipulation, we need more speculation, not less.

In a lightly traded market, prices are bound to be more volatile and opportunities for manipulation increase, because a few market participants can have a greater impact. In a market without speculators, the power to manipulate prices is transferred between producers and middlemen/buyers based on the health of the crop or the output of the commodity. These “mini monopolies” and monopolies cause more fluctuations to be transmitted to consumers in the form of different prices. When speculators see these volatile markets as trading opportunities, they enter and smooth price behavior and reduce their tendency to manipulate.

Show me the money

Speculators can make a lot of money under the right circumstances, which angers producers and consumers. But these huge profits are balanced with the risks they protect these consumers and producers from. Every speculator makes millions on a single contract, and at least the same number of people lose millions in transactions—or one dollar each in a million smaller transactions. In very turbulent markets, such as those following natural disasters or black swan events, speculators usually lose money as a whole, and maintain price stability by making up the difference from their strong financial resources.

Bottom line

In general, speculation transfers risks to those with financial means, and it helps us far more than it hurts us. Although speculators must face misunderstandings and negative emotions, as long as the government does not monitor them, the potential for huge profits will continue to attract people.

Since all negative sentiments are directed at short sellers and speculators, it is easy to forget that their activities maintain prices, prevent shortages and increase their risk. I don’t want to be a speculator, but it is important that we retain speculative investment for speculators-more importantly, this is a necessary condition for a healthy market and a vibrant economy. You don’t have to be a speculator, or even embrace the next one you see. Just remember that next time you spend more money on a gallon of gasoline, we will still have some surplus for next week and next year, ten years. And century.


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