Politicians misconstrue commodity market dynamics
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Politicians misconstrue commodity market dynamics

Institutional investment in commodity markets is boon not bane.

Proposals to ban large institutional investors from commodity markets being put forward in the US are misguided, as are similar ideas being discussed by some European politicians.

Institutional investors have deepened and enriched commodity markets, enabling producers and consumers to hedge more efficiently and far further in the future than ever before. Banning them or constraining their participation will only reduce liquidity and hurt market efficiency and won’t cure the problem of rising commodity prices.

Large institutional investors entering the market today are following the trend of rising commodity prices, not leading it. By and large, they are looking at multi-year investments and are not highly active traders. The high volume of trading in commodity markets from financial institutions largely comes from hedge funds, CTAs and investment banks that are actively taking positions in both directions.

Although there may be speculative excess in the prices of some commodities, the great thing about commodity futures, as opposed to purely financial markets, is that ultimately physical supply and demand forces provide a reality check that other anticipatory financial instruments don’t get. When financial bubbles get too big. they get pricked by pins from the physical market.

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