The 2008 commodity price boom: did speculation play a role?
- 315 Downloads
In the wake of the commodity boom and bust, a number of articles and reports have made the case that the surge in commodity prices and the subsequent fall were caused by speculation, particularly by index funds. This claim is reviewed and an overview of the arguments is presented. By way of background, particular features of commodity markets in general and of futures markets in particular are reviewed. It is argued that some of the support for the speculation hypothesis derives from a failure to appreciate that price spikes have always formed a feature of commodity markets and that commodity markets have a characteristic that does not exist to the same extent in other markets, namely the possibility to sell short. Moreover, proponents of the speculation hypothesis do not offer any credible explanation of how activities by index funds on futures markets led to rising prices in markets subject to backwardation. Some simple statistical and anecdotal evidence is presented that contradicts the speculation hypothesis. Finally, published studies are briefly reviewed, and it is concluded that most authoritative econometric studies reject the speculation hypothesis. Those that do not, suffer from shortcomings with respect to methodology or are inconclusive. It therefore appears that there is very limited basis for the arguments that the nature of commodity markets has changed or that speculators, particularly index funds, were responsible for the commodity price increases in 2008.
KeywordsTrade Commodity Price spike Speculation Index funds
I am grateful to two anonymous reviewers for several good suggestions which improved the draft considerably.
- Büyükşahin B, Haigh MS, Harris JH et al (2008) Fundamentals, Trader Activity and Derivative Pricing, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=966692, accessed on 20 May 2011.
- Chevalier JM (2010) Rapport du groupe de travail sur la volatilité des prix du pétrole, Ministère de l’économie, de l’industrie et de l’emploiGoogle Scholar
- Gilbert C (2010a) Commodity speculation and commodity investment. Journal of Commodity Markets and Risk ManagementGoogle Scholar
- Gilbert C (2010b) Speculative influences on commodity futures prices 2006–2008, Discussion Paper 472. UNCTAD/OSG/DP/2010/1, GenevaGoogle Scholar
- Hollands P (2009) Metal Price Formation: what if everything we thought we knew was wrong? LME Week SupplementGoogle Scholar
- IMF (2008) Global Financial Stability Report, OctoberGoogle Scholar
- IMF (2009) Global Financial Stability Report: Responding to the Financial Crisis and Measuring Systemic Risks, AprilGoogle Scholar
- Institute for Agriculture and Trade Policy (2008) Commodities Market Speculation: The Risk to Food Security and Agriculture, November 2008, MinneapolisGoogle Scholar
- International Organization of Securities Commissions (2009) Technical Committee, Report of the Task Force on Commodity Futures Markets, July.Google Scholar
- Irwin SH, DR Sanders (2010) “The Impact of Index and Swap Funds on Commodity Futures Markets: Preliminary Results”, OECD Food, Agriculture and Fisheries Working Papers, No. 27, OECD Publishing. doi: 10.1787/5kmd40wl1t5f-en
- Khan MS (2009) The 2008 Oil Price “Bubble”, Peterson Institute for International Economics, Policy Brief number PB09-19, August 2009Google Scholar
- Masters M (2008) Testimony before the Committee on Homeland Security and Governmental Affairs, United States Senate, May 20, 2008Google Scholar
- Phillips PCB, Yu J (2010) Dating the Timeline of Financial Bubbles During the Subprime CrisisGoogle Scholar
- Sanders DR, Irwin SH, Leuthold RM (1996) Noise Trader Demand in Futures Markets, OFOR Paper Number 96–02Google Scholar
- Tang K, Xiong W (2011) Index Investment and Financialization of Commodities, http://www.princeton.edu/~wxiong/papers/commodity.pdf, accessed on 20 May 2011
- UNCTAD (2008) Trade and Development ReportGoogle Scholar
- UNCTAD (2009) The Global Economic Crisis, Systemic Failures and Multilateral Remedies, New York and GenevaGoogle Scholar
- United States Commodity Futures Trading Commission (CFTC) (2008) Interim Report on Crude Oil, Interagency Task Force on Commodity Markets, Washington, D.C., JulyGoogle Scholar
- United States Senate (2009) Excessive Speculation in the Wheat Market, Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, Majority and Minority Staff Report.Google Scholar
- Verlegen PK (2007) Comments on Energy Markets, Volume I, Number 1, May 16Google Scholar