Commodity Bubbles Caused by Speculators Need Intervention
Source: Bloomberg, Tony Dreibus (6/6/11)
"Increased investment in commodity markets creates bubbles. . ."
Commodity markets need international oversight, more transparency and intervention to deflate bubbles because increasing speculation means prices are no longer driven by supply and demand.
Increased investment in commodity markets has encouraged "herding behavior" and creates bubbles, the UN's Conference on Trade and Development said in a report published today. Anticipation of the global economic recovery played a "disproportionate role" in higher commodity prices.
"Prices can move far from levels justified by the fundamentals for extended periods, leading to an increasing risk of price bubbles," the UN said in the report. "Due to these distortions, commodity prices do not always provide correct signals about the relative scarcity of commodities."
The UN's Food Price Index neared a record set in February last month as commodity futures gained. Corn and silver have more than doubled in the past year and gold is up 27%. Rice is up 32%.
The "financialization" of commodity markets that's increased since 2004 has led to a lack of "price discovery" that farmers and miners use to make hedging decisions.