Commodity prices ran up to some impressive highs between 2007 and 2008, causing regulators to question the role of speculators in exchange traded funds (ETFs). But an agricultural think tank says they just don’t see a link.
According to a recent study conducted by the Agricultural & Applied Economics Association, index funds had little to do with the speculative price changes, such as oil prices hitting nearly $150 a barrel, in the months leading to the market crash in September 2008, writes Cinthia Murphy for IndexUniverse. Strong demand, among other reasons, were the actual causes of the huge price increases.
Published in the AAEA’s journal, the Applied Economic Perspectives and Policy says that “to date, no smoking gun has been found” that would indicate a cause/effect relationship between index funds and commodity futures prices. “The lack of a direct empirical link between index fund trading and commodity futures prices casts considerable doubt on the belief that index funds fueled a price bubble,” write authors Scott Irwin and Dwight Sanders.
The two academics argue instead that strong fundamentals drove commodity prices higher before the financial downturn. Irwin and Sanders state that increased demand from emerging markets affected prices of basically every commodity and that commodities priced in U.S. dollars became more expensive after the Federal Reserve weakened the dollar by implementing a loose monetary policy. Additionally, the authors noted the tighter supplies of some raw materials, such as the conversion of corn to biofuel supplies, as reasons for rising commodity prices.
This certainly lines up with what the ETF providers themselves told regulators: they were not the cause of the commodity price spike. Will the Commodity Futures Trading Commission (CFTC) make a firm ruling now, in light of the latest data?
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.