Reply #5: addendum: Derivatives and Speculation in commodities [View All]

[Bill USA]

I thought I added this in the post yesterday, but somehow it didn't 'take'..(maybe I logged off before updating)..

one of the 'innovations' that has been created in recent years are commodity index funds. Funds which invest in a number of commodities to broaden the risk and enable investors (generally large institutional investors) to invest in commodities which ordinarily they would not be able to. They invest in a basket of commodities (a collection of from 17 to 25 commodities) which dramatically reduces the risk of investing in commodities.

The other sort of demonic twist in this story is the Commodity Futures Modernization Act (CFMA)(see http://motherjones.com/politics/2008/05/foreclosure-phil">Who Wrecked the Economy? Foreclosure Phil - Mother Jones) which allows investors to speculate in commodities without being tracked by the Commodities Futures Trading Commission. (note that Phil Gramm slipped the CFMA in as a rider to the Omnibus Funding bill, which was up for a vote in the last few days of the Clinton administration. The funding bill was veto proof as it had to be passed to keep the government funded and since there were only a couple days left in the Congressional session there would have been no time to veto and rewrite the bill even if anybody knew the CFMA was in there. Virtually nobody in Congress even knew the CFMA was in the 11,000 page Omnibus Funding bill) They do this by buying Credit Default Swaps from a bank and the bank buys the commodities for the speculator. This way the CFTC can't monitor if one or a small number of speculators are monopolizing and possibly manipulating the market in certain commodities. This is written into the CFMA.

Now, note what Michael Masters, hedge fund manager had to say to a Senate Committee:

http://hsgac.senate.gov/public/_files/052008Masters.pdf

"Assets allocated to commodity index trading strategies have risen from $13 billion at the end of
2003 to $260 billion as of March 2008, and the prices of the 25 commodities that
compose these indices have risen by an average of 183% in those five years!"

Note that is a growth of dollars bet on commodities of 20 times - in five years!

and here's what Master had to say about speculation in Wheat:

"....in 2007 Americans consumed 2.22 bushels of Wheat per capita. At 1.3 billion bushels, the current Wheat futures stockpile of Index Speculators is enough to supply every American citizen with all the bread, pasta and baked goods they can eat for the next two years!"

....jeeze, you think that might affect wheat prices??


http://www.cftc.gov/ucm/groups/public/@lrrulesandstatutoryauthority/documents/file/ogchr5660.pdf">Commodity Futures Modernization Act

and on the next to the last page of the act:

http://www.cftc.gov/ucm/groups/public/@lrrulesandstatutoryauthority/documents/file/ogchr5660.pdf#page=261">SEC. 407. EXCLUSION OF COVERED SWAP AGREEMENTS.

No provision of the Commodity Exchange Act (other
than section 5b of such Act with respect to the clearing
of covered swap agreements) shall apply to and the
Commodity Futures Trading Commission shall not
exercise regulatory authority with respect to,
a covered swap agreement offered, entered into, or provided by a bank.