What Role do Speculators Play in Commodity Markets?



In most cases, investors rejoice when prices in financial markets rise. This is because most investors are bullish on the market, and as the market index rises, they can profit. But commodity markets are a bit more complicated. Although the price increase will bring greater benefits to the holders of the commodities, it will also cause a substantial increase in the expenses of enterprises and consumers.


Volatility is also one of the important factors affecting the commodity market. It is difficult for companies and individuals to accurately plan for the future because of volatility. When prices fluctuate wildly, it can be difficult for companies to budget for future production activities, and individual consumers don’t know how much disposable income they will have left after a surge in oil prices or other consumer goods.



When commodity prices fluctuate wildly, investors, politicians and market regulators will invariably begin to question those speculators in the market. In commodity markets, speculators can invest in a range of financial instruments or index products based on physical commodity prices and profit from rising or falling commodity prices. Commodities mainly traded in the commodity market include oil, precious metals such as gold, silver, and copper, as well as agricultural products such as corn, wheat and even frozen orange juice concentrate.



The U.S. Commodity Futures Trading Commission (CFTC) recently issued a series of regulations to regulate the behavior of speculators in the commodity market, including restrictions on the trading volume of 28 commodities, including crude oil, grain, silver, etc., to combat speculation and prevent them from pushing up commodity prices to dangerous levels, thereby maintaining market stability.

The premise of these new rules is that speculation is the main cause of price volatility, which is why speculators have been constantly criticized. However, there is currently no evidence to support the idea that speculation will cause market price fluctuations. And we believe that limiting speculation in the market is likely to outweigh the gains.

First, speculators play an important role in commodity markets. Whether trading commodity futures or actually holding the commodities, traders always have a valid reason to trade. By buying futures or commodities, companies can hedge against rapid price rises and falls, and farmers can get some compensation in the event of natural disasters or sudden changes in demand. At this point, some people are needed to stand on their opposite, the so-called speculators. In this way, speculators play an important role in promoting the liquidity of the market, and indirectly help to achieve a reduction in transaction fees.

In addition, changes in the relationship between supply and demand are the most critical factors affecting commodity prices. The credit crisis led to a rapid decline in demand for many commodities, including oil and iron ore for steel production. The use of ethanol fuel will increase the market demand for corn, thereby pushing up the price of corn. Changes in supply are unforeseeable as well. For example, when a natural drought occurs, the prices of corn, cotton and other related commodities can be severely affected; likewise, wet weather can affect the growth of crops. A few years ago, the red grapes in Australia were in short supply due to wet weather.


Speculators should be closely monitored for any unethical or even illegal behavior. But for now, the view that these illegal activities are the main factor affecting the overall commodity price fluctuations is only speculation, and there is no real evidence.