Do futures trading and commodity trading distort the spot price in a negative way?

A

afiacpti

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).

I hear about silver being a manipulated commodity; 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?
 
afiacpti said:
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).

I hear about silver being a manipulated commodity; 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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Pretty much no.
An exception maybe oil, XOM noted once an uneeded $20 spec premium ....................................................................................................................
Silver coin buyers/hoarders may put long term pressure on that;
but i cant prove that like XOM can being in that oil business.............................................
 
Interesting question and I'd like to add to it.

I haven't had time to fully think of all the possibilities but it does seem to create more speculation through the ease of transactions then if we didn't have the futures market. That speculation goes both ways so I cant really say whether it puts downward pressure or upward pressure. Although I think it probably smoothes out what may otherwise be spikes in demand and supply. Because the speculator will naturally fade the tops and buy the dips.

With real commodities like oil and gold where the underlying asset is produced or mined somewhere (unlike say VIX futures or s&p futures) it does allow miners and industrials producers / users to hedge against the speculators (that have no actual use for the commodity other than to try and profit off price fluctuations) and I think that creates more price stability perhaps. I think that is a good thing because it guarantees a stable price far into the future for the miner or oil driller. If I was a driller I'd need to sell say Dec 2022 oil futures to guarantee a price that I can say "ok that will guarantee me a profit on my investment to drill for oil at that price" with certainty. If I didn't have that then I would probably not take the risk of drilling. I would say this is a positive effect for the economy as it transfers risk in a safe and predictable fashion which allows for the production or risky ventures that may otherwise be too risky to take.

That only answers part of your question as there is a lot more too it. Like you said the silver manipulation. I don't fully understand it but I think there may be something fucked up there. A few months ago the silver reserves around the world nearly ran out yet we have no increase in price. I don't fully understand why and if there is manipulation going how exactly are they doing it and where/ how is the profit being made.

Also looking at the commitment of traders report is interesting as well although sometimes doesn't really reveal much if anything. But it does show you the 3 classes of traders and where they are positioned.
 
xandman said:
Better price discovery than a bunch of dealers making phone calls or having steak lunches together.
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I've worked in a commodity market that was exactly this. Very inefficient, both the huge commissions that get paid and the variance in prices that different participants end up getting/paying for the same thing at about the same time. Actually though it's the clients they take out for steak lunches...paid for with their commissions!
 
murray t turtle said:
%%
Pretty much no.
An exception maybe oil, XOM noted once an uneeded $20 spec premium ....................................................................................................................
Silver coin buyers/hoarders may put long term pressure on that;
but i cant prove that like XOM can being in that oil business.............................................
More...

So, you think XOM is negatively impacted by traders? Silverbugs continue to say that SLV etf is being used in conjunction with derivatives to keep the spot price low.

My intuition is that there might be cases of spot being negatively impacted and cases of spot being positively impacted are out there. But I am just too inexperienced a person to determine if it is actually true or not.
 
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afiacpti said:
So, you think XOM is negatively impacted by traders? Silverbugs continue to say that SLV etf is being used in conjunction with derivatives to keep the spot price low.

My intuition is that there might be cases of spot being negatively impacted and cases of spot being positively impacted are out there. But I am just too inexperienced a person to determine if it is actually true or not.
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MOSTLY no;
LOL i buy gasoline from them someimes a bit overpriced+ i've bought thier overpriced traders coffee.....................................................................................Back to my uptrending spxl ,upro, /sds uptrends.XOM + most oil+ gas corps pay such a good dividend, i make sure to do some kind of non green business with them.:caution::caution::caution::caution::caution::caution::caution:,:D:D:D:D:D
 
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Clearly the financial futures market distort the actual commodity markets. Remember back in 2008 of the financial crisis? We were in recession, but crude oil price was sky high > $100. That was because people consider crude oil is a reserve commodity and store of value. The real oil price should be $40 or $50 in that market. Also, the oil price was negative in April 2020.

Future market is supposed to be the market for price discovery. But with so much money in the game, the commodity market is determined by the financial players, not the real stakeholders.

And yet CFTC has very loose regulation. Almost everyone can participate in the futures trading with little capital.

Look at the Bitcoin? It is free market. Distorting the commodity? What is the bitcoin commodity?
 
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