The Anti-Speculation Cycle

After studying various controversies about speculation in commodity futures markets, I realized that there was a cyclical element to the eruptions over speculation. I then came up with the idea of an “anti-speculation cycle” in commodity futures markets. I believe the best presentation of the idea was in my recent book with Dwight Sanders, Speculation by Commodity Index Funds: The Impact on Food and Energy Prices. In the final chapter of our book, Dwight and I put it this way:

There is a historical cycle to the attacks on speculation through the years, which is demonstrated in Figure 13.1.  When prices are low, natural sellers in the market, such as farmers, complain that speculators are the problem and when prices are high, natural buyers in the market, such as consumers and processors, complain that speculators are the problem.  Petzel (1981, p. 117) describes several instances of this cycle, “In periods of rising prices (e.g., the early 1920s, the Korean War, inflation, and the 1970s) grain speculators have been accused of increasing the prices of agricultural commodities artificially.  During the early 1930s when agricultural prices were low, grain speculators were accused of depressing prices.”  We agree wholeheartedly with Petzel (1981, p. 126), that “…it is all too easy after suffering an economic loss to look for the villain in the piece.” 

I reproduce Figure 13.1 from our book below:

You might imagine that I was very interested earlier this week when I ran across a similar figure in a post by a writer and analyst named Steven Hayward. Steven and I are clearly kindred souls. I have to say that I like his version of the anti-speculation cycle even better than my own as it pulls in politicians, the public, and conspiracy theories. He also perfectly contrasts the views of economists compared to pretty much everyone else on this subject.

One thing is perfectly clear to me: the anti-speculation cycle is alive and well in commodity markets. If you doubt me, see this Bloomberg article from last November with the headline, “Saudi Energy Minister Blames Speculators for Oil Price Drop.”

 

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