Monday, April 20, 2009

Commodities has an interesting article on commodities (and that includes oil, precious metals, food). The article uses a report from the UN on commodity trading to point out the facts that investors and above all large institutional investors distort the commodity prices, create artificial swings and drive the prices away from real value. Artificially driving up the prices for the purpose of profit taking on basic food (wheat, rice) is questionably moral as the welfare and health of millions of people depend on them. Furthermore the volume of commodity trading has increased drastically and with 95% being done in derivatives, namely futures, it is clear that commodities have become a tool for speculation rather than a tool for distributing and arbitrating food producers and consumers. Once again we have moved away from providing a meaningful, responsible process to a misuse of the system with no value (but a lot of damage) for the general community.

Option contracts have grown 5-fold in the last 10 years. Notional amount of outstanding OTC commodity derivatives went from $1 trillion in 2004 to over $13 trillion in 2008, making them a bubble. More data on Personally I moved away from equities to commodities in the hope of reducing risk and exposure. But now after reading this article it became clear that the risk has traveled a lot faster than me. Risk has arrived at the commodity market some 5 years ago as it became a profit-taking playground for big investors. Artificially manipulated price and intrinsic value of commodities have been separated.

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