Saturday, August 2, 2008

SPECULATION, INFLATION AND COMMODITY MARKET

The excessive volatility in commodity market can be attributed to excessive speculation. The current phase of inflation under which all the countries, the developed, developing and not to mention the poor, are reeling is a direct fall out of this. The excessive speculation in commodity market if allowed unfettered the mankind may go through this roller coaster rides for ever. Obviously it will be sickening and threats to derail the world economy and spreading famine, unemployment, drought and obviously another world war. Let us not forget the terms of surrender for Germans in 1st world war contained the seeds of the 2nd. The “reparation” clause as a term of surrender imposed upon Germany by the victors was not sustainable, so the result was the Second World War. The rest is history. The recent oil price hike, as alleged by Saudi Arabia, is not due to shortage of crude but excessive speculation of crude in the global commodity market. The oil price is looking down currently around $122 per barrel, with Saudi Arabia raising 700000 barrels per day more to control the price. Still it is far above the real price, what should be around $65-70 per barrel as per the experts. The raising of oil is well in tandem with global demand and it is streamlined till 2030A.D as per the projected global demand. The supply is likely to be steady given there is no trouble in the oil producing region. Like disruption of supply in Nigeria or Israel attacking Iran for US military purpose. The depleting oil reserve is believed to cause no worry till 2050A.D; by then all the way it is likely some alternative of fossil fuel to be invented. Given to the situation it is speculative activities that pulled up the oil with other commodities prices all over the world. The world watches helplessly.
According to Barclays Research, there has been 20 fold increases in participation in commodity future market since 2003. It was $13 billion in December 2003 and in March 2008, it is $260 billion. The speculations have been primarily in 25 commodities; energy (49%), agriculture (21%), precious metals (19%) and base metals (11%). Some countries set up sovereign wealth funds, they are aggressively investing in commodity futures and have been benefiting the windfall gains with commodity prices sky rocketing and an increase in index futures. Commodity market is basically for hedgers but they permit besides hedge funds, pension, index and other funds too. Thus the very purpose of hedging for what commodity market is created for is jeopardized. Instead speculative funds are making heydays putting the whole world in inflationary tenterhooks. It is high time now that some action is initiated on world consensus to rein speculative funds on commodities futures. The strict measures and monitoring is certain to yield results. Obviously, US have to take the lead as usual and European Union should support the cause for mooting any such program. However, with election in mind, considering funding it, any measures for US politicians is hard to take at this juncture!

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