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Futures and commodity trading are one of the main way (if not the main way) how spot prices get determined.

But the sheer scale of futures and commodities market and their notional value is mind boggling and almost none of them lead to actual underlying being delivered. This makes me wonder, if there were no futures or commodity trades, wouldn't there be much more demand for the "real thing" and wouldn't it make the price much more volatile and much more higher than current price (as demand for the price appreciation or depreciation of that product is being fulfilled electronically rather than using the underlying asset).

Speculators would be forced to participate in the trading of the underlying which would increase the demand of that underlying and shorting that underlying would be much more difficult which would create a positive price pressure compared to the current scenario.

I hear about silver being a manipulated commodity where futures along with the SLV etf is being used to manipulate the underlying's price; some people even imply that futures and commodity trading have helped keep speculators invest their money in those assets thus reducing the overall inflation in the broader economy as their money chase may be S&P 500 futures instead of investing that money into the "real" economy.

How accurate are these notions? Do futures and commodity trading really impact the underlying in a negative way? An extension to the question would be, do futures/cryptos etc really help keep a lid on inflation?

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    $\begingroup$ This is an issue that was widely discussed a few years ago under the heading of "financialization of commodity markets" (please google) . There was a wide difference of opinions and it was never really resolved AFAIK. $\endgroup$
    – nbbo2
    Nov 2, 2021 at 7:46
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    $\begingroup$ Popular topic during/after GFC both because of oil in 2008 and food prices in 2011. JPM published a paper in 2011, "Commodity Prices and Futures Positions", which states, "Our main results are: Changes in positions and changes in commodity prices are mostly driven by changes in economic conditions (contemporaneous or future changes). Changes in futures positions that are uncorrelated to economic conditions (current or future) have only a modest impact on commodity price volatility, and no medium-term effect on price levels." That said, I agree with @noob2 that 'it was never really resolved'. $\endgroup$
    – user42108
    Nov 2, 2021 at 12:59
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    $\begingroup$ "I hear about silver being a manipulated commodity where futures along with the SLV etf is being used to manipulate the underlying's price" - the manipulation in metals is likely via front-running, spoofing, banging the close, etc, all of which are documented via legal cases brought against those responsible; you can easily find details online. The idea that "the bullion banks" have been capping precious metals prices since time immemorial is a long-standing conspiracy theory; if you have evidence, please post it. $\endgroup$
    – user42108
    Nov 3, 2021 at 20:14

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Firstly, a small nit. When you say 'commodities trading' in your question, I'm going to assume you mean forward or other derivative trading on the commodity. "Commoditity" trading in this example would more likely be associated with the type of thing being traded (eg, corn, metal, etc), as opposed to financial instruments / contracts.

  • Q: Can futures / forwards / other derivatives trading influence the spot price? and can that influence distort prices up and down, and in a "bad" way?

  • Q: Can derivatives like futures and forwards be used to manipulate the spot price?

  • Q: Are there ways to manipulate the price not using derviatives?

  • Q: Is market manipulation prohibited in most jurisdictions?

    A: Yes to all the above

We can ask ourselves why forwards (and then futures & options etc) were invented. Mostly they were a way for producers (eg, corn farmers etc) to reduce their risk to prices in the future being a long way from where they are now.

For example, if you know that you will probably be able to deliver 100 tons of corn in 6 months and you wish to lock in the price now, perhaps you strike a deal with a buyer for 100 tons of corn, in 6 months, at 10 USD per ton. Now if the price of corn goes down, it doesn't matter to you. That is a forward contract (which is similar, for the purposes of this answer, to a future).

Who is on the other side of the contract? Someone who maybe believes that the price will go up. Via the contract, you have managed your risk, by transferring it to someone else, who wanted it. This is the fundamental utility of financial contracts, and without it people can get stuck with risk they don't want. This is why they are permitted, because not having them would be much worse for everyone. Of course, some market controls are required, but that's another can of worms entirely.

As for inflation, I don't think the use of forwards / futures / crypto has any effect on inflation what so ever. Inflation is generally driven by a strong rise in demand relative to supply, low interest rates, or money supply.

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