A United Nations body has joined those who blame speculation for much of the high volatility in commodity prices.
The United Nations Conference on Trade and Development (Unctad) acknowledged in a report* published last week that fundamental factors have played a role and also that speculation can provide hedging opportunities. But it went on to argue that the trend towards speculation has gone too far: “in recent years speculation may have become excessive, amplifying price movements to such an extent that they no longer reflect market fundamentals”.
As evidence it pointed to the substantial growth in the volume of trade in the main commodities futures markets around the world. It noted that such markets have experienced record trading. In addition, outstanding amounts in over-the-counter commodity derivatives increased by almost 160% between June 2005 and June 2007.
It suggests that index speculators have played a substantial role in the rising importance of speculation. The report notes that index speculators have moved into commodities as a portfolio diversification move following problems in the stock and bond markets.
Unctad argues that tighter control of the financial markets is needed to curb speculative activity. Supachai Panitchpakdi, the secretary general of Unctad, said at the launch of the report that “this is one of the financial markets that need to have better oversight”.
Unctad joins other voices which have pointed to speculation as a factor in prompting price volatility (see Daniel Ben-Ami. “Over a barrel”, Fund Strategy, August 25, 2008). For example, the Organization of the Petroleum Exporting Countries has blamed speculators for much of the volatility in the oil market. In contrast, the International Energy Agency and America’s Commodities Futures Trading Commission have argued fundamental factors are key.
In addition to its discussion of speculation the Unctad report examines several other developments in the world economy. These include what it calls the “capital flow paradox”: net capital flows are moving from poor countries to the rich world whereas conventional economic theory suggests they should move in the opposite direction.* “Trade and Development Report 2008: Commodity prices, capital flows and the financing of investment”. Available at www.unctad.org.