Index Speculation in commodities …

The real reason behind the firmness in selected commodities is …
Index speculation … as too much money floats around, looking for yield.

As currencies are quite stable … compared to the 80′s …
and neither bond markets nor equity markets look promising …
especially after the collapse of the real estate markets …

MONEY looks for other fields … COMMODITIES …

The players’ main investing strategy: they distribute their allocation of dollars across the 25 key commodities futures according to the popular indices – the Standard & Poors – Goldman Sachs Commodity Index and the Dow Jones – AIG Commodity Index.

Statistics show, that this “indexed speculation” rose from a tiny 13bln $ in 2003 20-fold to more than 260 bln$ in 2008 !!!

To put things into perspective …

Statistics show, that the demand increase for Oil equals within the last 5 years the demand increase from one “tiny country”, often named as the culprit for rising prices … CHINA …

Often named as well as the price driving factor … the build up of the National Strategic Oil Reserve … this buildup is DWARFED by the speculators … their appetite was 8 times bigger …

Five years ago, Index Speculators were a tiny fraction of the commodities futures markets. Today, in many commodities futures markets, they are the single largest force. AUTSCH!!!

Index Speculator demand is quite different from traditional demand. It depends on portfolio allocation ONLY.

When an Index Speculator decides to allocate 2% of his portfolio to commodities, they come to the market with a set amount of money. They don’t care about the price per unit. They just buy as many futures contracts needed, at whatever price necessary, until the dedicated money has been invested. Their insensitivity to price raises their impact on the specific commodity.

One particularly troubling aspect of Index Speculator demand is that it actually increases the more prices increase. Rising prices attract more money, as prices rise, allocation is often increased … exactly the opposite of what you would expect from a price-sensitive consumer/speculator.

Index Speculators buy futures and then roll their positions by buying calendar spreads. They never sell. Therefore, they consume liquidity and provide zero benefit to the futures markets.

As we hear now rumours about the U.S. might be curbing this indexed speculation … imagine the outcome … crashing commodities markets … So take care and never be complacent!!!

And be aware that Dubai wants to grab the business of the U.S. based commodities markets … another shift in global power …
scary …

Be humble

Tags: Commodities, Dubai, Oil, speculation

This entry was posted on Mittwoch, Mai 28th, 2008 at 14:33 and is filed under FDAX. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.