Friday, May 09, 2008

Is the Commodities Boom Driven by Speculation?

Seeing crude oil passing $125 per barrel, I want to open a fresh discussion on the titled subject. I'd like to hear what you smart guys outthere think.  But first let me start by quoting the following:
"On a slow afternoon, trader A decided to open a market for a can of sardines. Bidding started at $1. B bought it for $2 and sold it to C for $3. D and E decided to get into the act, with the result that E became the owner for $5.
E decided to open the can and discovered the sardines had gone bad. He went back to A to get his money back, protesting that the sardines were rotten. A smiled broadly, and said, " You don't understand. Those were trading sardines, not eating sardines."
This is to say: I believe the current runup is largely speculation. You may argue speculation is also one kind of demand, i.e. demand for hedging risk, demand from investment seeking abnormal return...but it's quite different from what we usually described as fundamental driven demand, for example, China and India need more energy to grow, and US consumers need gas for road trip, etc.