Review Review Commodity prices have seen a surge in recent years - - PDF document

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What role for speculators in driving commodity prices?

MPDD Seminar

April 5, 2012

Margit Molnar and Yusuke Tateno UNESCAP Macroeconomic Policy and Development Division

Review Review

 Commodity prices have seen a surge in

recent years

100 200 300 400 500 600 700 800 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 2 2 2 4 2 6 2 8 2 1 2 1 2 Price index (1992=100) All primary commodities Food Agricultural raw materials Metals Energy

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Review Review

 Economic fundamentals do not fully explain

commodity price hikes

 Physical demand factors have limited role

0% 2% 4% 6% 8% 10% 12% 14% 16% 1 9 8 8 1 9 9 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 2 2 2 4 2 6 2 8 2 1 Import shares 100 200 300 400 500 600

Commodity price index (1992=100) Food imports Fuel imports Food price index (right scale) Fuel price index (right scale)

Review Review

 What else?

– Supply-side constraints – Export restriction – Financial investors

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Financialisation Financialisation of commodities

• f commodities

 Flight to simplicity (exodus from ABS etc.

complicated products)

 Monetary easing

– (at lower interest rates producers have lower

incentives to increase production so that the proceeds can be invested in high-yield instruments)

Speculators Speculators

 investors not actually holding commodities but

seeking arbitrage opportunities in commodities futures and options markets

– hedge funds – financial institutions – commodity trading advisors – commodity pool operators – associate brokers – introducing brokers – floor brokers – and other non-commercial traders

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Do speculators play a role? Do speculators play a role?

How to pin down their effect?

 comparing the price changes in commodities with

and without organised futures markets.

 If speculators play a role, commodity with futures

markets should have different price behaviour from non- speculatable commodities.

Correlation of price changes Correlation of price changes

• 0.4
• 0.2

0.2 0.4 0.6 0.8 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 2 2 2 4 2 6 2 8 2 1 Average correlation of speculatable commodities Average correlation of non-speculatable commodities

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Do speculators play a role? Do speculators play a role?

How to pin down their effect?

 comparing the price changes in commodities with and

without organised futures markets.

 If speculators play a role, commodity with futures

markets should have different price behaviour from non- speculatable commodities.

 Due to substitution and other effects, also non-

speculatable commodity prices tend to rise if those with

• rganised futures markets rise, though it should happen

with a lag.

 Korniotis (2009) shows that the comovement between metals

with and without futures contracts has not weakened in recent years as speculative activity has risen

How to pin down speculators How to pin down speculators’ ’ effects effects (cont.) (cont.)

 look at the changes in positions in futures

and options markets of non-commercial traders.

 To what extent position changes by non-

commercial traders, in particular hedge funds etc. are associated with price changes?

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An additional idea An additional idea

Framework: cointegration among commodity price inflation, non- commercial trader positions and monetary/financial market conditions Test for the absence of cointegration by determining whether there exists error correction for individual panel members or for the panel as a whole. The tests are general enough to allow for a large degree of heterogeneity, both in the long-run cointegrating relationship and in the short-run dynamics, and dependence within as well as across the cross-sectional units. The relationship exists for several choices of monetary/financial market conditions (currency in circulation, M1, M2, M3, credit, exchange rate, stock price indices) evidence of cointegration for the panel as a whole and for a number of lag choices VECM: check the short- and long-term impacts of speculators on commodity price inflation

Estimated equation Estimated equation

t i i T i T t i s t i m t i s t i p t i s t i s t i m t i s t i m t i p , ) 3 1 , 2 1 , ln } 1 , 2 1 { 1 , ](ln 1 , 1 5 [ , ln 4 , ln 3 , ln 2 , ln 1 , ln                                  

where p indicates price of a commodity, m is a monetary variable, s is speculation, all in logarithmic forms and T is the time trend. Panel dataset of 9 commodities over Jan 2009-May 2011

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Preliminary results Preliminary results

non-commercial non- reported mzm m3 SP500 mzm Short-term coefficients Money supply (growth) + + + Speculators' net position (change) + + + Money supply (level)

• +

Speculators' net position (level) + + + + Time trend + + Dynamic coefficient

• Long-term coefficients

Money supply

• (14%)

+ Speculators' net position + + + +(12%) Trend +(14%) + Interaction term coefficients Speculators' np - price +(15%) + Speculators' np - Money supply + + +

Summary Summary – – What What’ ’s role for speculators? s role for speculators?

 Boost commodities prices both in the short

and in the long run

 Tighten the link between monetary/financial

variables and commodity prices

 In some cases decelerate the speed of

adjustment of prices back to equilibrium after experiencing a shock

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Future directions Future directions

 Demand control

– World production  biggest demand from

countries with low production efficiency

 Extension of time series and coverage of

commodities

 Explore cross-market linkages and regional

dimension

Thank you!