Email of the day (1)
Comment of the Day

February 01 2011

Commentary by David Fuller

Email of the day (1)

On the ethics of contributing to commodity price spikes:
"hi David, i have been a great admirer of your service since i became a subscriber nearly 5 years ago and as a result have progressed from a hopeless investor/trader to an investor/trader with hope! Now the gripe, i listened intently to your analysis of the agricultural commodities situation over the last several weeks and profited from it despite suffering from a moral hangover.

"However with a little bit of encouragement from one of your recent broadcasts where you referred to the moral implications of profiting on food price increases which disproportionately affected the poor and hungry, of which there are many, i decided to stop trading in these instruments as i thought maybe you had for the same reasons; so i was more than surprised to see you open new positions in wheat and rice in the last few days."

David Fuller's view Thanks for the feedback and for your very good point on the "moral implications of profiting on [from] food price increases."

Unintentionally, the speculator often plays a benign role in buying low and selling high. Ideally, this helps to narrow peak to trough swings in prices, while adding liquidity to the markets. That is the main reason why speculators have seldom been discouraged from trading in commodity markets.

However this happy outcome can be reversed if speculators are sufficient in numbers and size to distort commodity markets, driving them to heights which do create hardship for consumers and mainly among the poor. This last happened in 1H 2008, when we had similar discussions, as veteran subscribers may recall. Grains and beans are well below those former heights today, but more importantly, they are heading in that direction once again, due to fundamental shortages which also attract speculation.

Subscribers are more than capable of making their own assessments of these issues and I speak only for myself. However I have pointed out that staple commodities were never intended to be buy-and-hold investments. Tracker funds in particular can distort commodity markets because the holders seldom take short-term profits. This can have unintended but very damaging consequences, as I pointed out with crude oil's recession inducing spike in 2008, which was fuelled primarily by speculation.

When I bought wheat and rough rice last Friday, during a small setback in prices, I was allowing my trading instincts to get the upper hand. Tactically, it was the right decision but ethically, at least for me, it was the wrong decision given my earlier misgivings. Therefore I closed my wheat and rough rice long positions today and I will give the profits to the children's charity, UNICEF.

I also had a second, cautioning message mentioned on several occasions last month. The CFTC is conducting a 6-month study and discussion of commodity speculation, commencing last month. It is likely to be somewhat of a political football but unless commodity prices fall back sharply for some reason between now and the end of July, we should not be surprised if measures are introduced to curb speculation. I would not be surprised if some large institutional speculators in commodities reduce their exposure to agricultural commodities between now and then, in an effort to fly below the regulatory radar.

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