...Much has been made of the supposed role played by "speculators," but this term no longer adequately describes the full breadth of non-commercial participation in today's market.
There are indeed still speculators of the traditional variety -- highly leveraged players who play both the long and short side of the market and move quickly in and out of positions. However, today's commodity futures activity is marked by the presence of a new type of non-commercial participant. These new players treat commodity futures as an investment asset class, and they represent some of the largest pension funds and asset managers in the country....
....Unfortunately, some of the debate has been informed more by sentiment than by fact -- after all, we instinctively think of "investment" as good and "speculation" as bad. In the futures world, the opposite is true. Speculators, with their high levels of margin and short-term trading, create a tremendous amount of volume with a limited amount of capital, ensuring critical market liquidity. Investors, on the other hand, provide little benefit to the futures world, and lots of problems.
The commodity markets operated quite efficiently without "investors," who have only entered the arena in any size within the last few years. The introduction of roughly $260 billion dollars of long-only investment has effectively created an order imbalance -- futures prices have had to move higher to draw out opposing short interest. The capital pools upon which the investors draw upon are quite deep.In contrast, traditional speculators have limited trading capital. Commercial participants are constrained by both the size of their working business capital and by the amount of physical commodity they can control. The capital committed to commodity investors is large and growing, and if current trends continue unchecked, it could grow to several trillion dollars.Much has been made of the investors' position size relative to the physical marketplace, but it is also worth considering the size of the investor commitments relative to the speculator commitments. The chart below illustrates data from the CFTC's supplemental Commitment of Traders report which includes indexed investor positions for select marketplaces....MORE