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Devil or Angel? The Role of Speculation in the Recent Commodity Price Boom (and Bust)

Published online by Cambridge University Press:  26 January 2015

Scott H. Irwin ,
Dwight R. Sanders  and
Robert P. Merrin
Scott H. Irwin
Affiliation:
Department of Agricultural and Consumer Economics at the University of Illinois at Urbana–Champaign
Dwight R. Sanders
Affiliation:
Department of Agribusiness Economics at Southern Illinois University, Carbondale, Illinois
Robert P. Merrin
Affiliation:
Department of Finance at Universiteit Maastricht, The Netherlands
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Abstract

It is commonly asserted that speculative buying by index funds in commodity futures and over-the–counter derivatives markets created a “bubble“ in commodity prices, with the result that prices, and crude oil prices, in particular, far exceeded fundamental values at the peak. The purpose of this paper is to show that the bubble argument simply does not withstand close scrutiny. Four main points are explored. First, the arguments of bubble proponents are conceptually flawed and reflect fundamental and basic misunderstandings of how commodity futures markets actually work. Second, a number of facts about the situation in commodity markets are inconsistent with the existence of a substantial bubble in commodity prices. Third, available statistical evidence does not indicate that positions for any group in commodity futures markets, including long-only index funds, consistently lead futures price changes. Fourth, there is a historical pattern of attacks upon speculation during periods of extreme market volatility.

Keywords

commodityfuturesindex fundmarketspeculationQ11Q13
Type
Invited Paper Sessions
Information
Journal of Agricultural and Applied Economics , Volume 41 , Issue 2 , August 2009 , pp. 377 - 391
Copyright
Copyright © Southern Agricultural Economics Association 2009

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