jay21
With due respect, it sounds like you've got a long way to go in your quest for knowledge. But it's an interesting journey so good luck.
I could give a succession of detailed replies to address each of your points but I'm not.
However, a question for you to ponder...
Which is more acceptable - A farmer going out of business because prices are deemed "too low", or a consumer having less or no money in his pocket because prices are deemed "too high"? And who gets to decide this? It becomes a very political matter, depending on your viewpoint.
Note that a structural change occurred in the last decade that was in large part the unintended consequence of Government/Fed policies to devalue paper currencies (printing more dollars to reduce the real value of debt in excessively indebted economies). Clearly, you make paper dollars worth less by increasing their supply via QE money printing, and increase the relative attractiveness of real assets and inflation hedges such as commodities. Commodities have developed an underlying appeal to long term investors because they benefit from excessive Fed money printing and sub-1% interest rates. If the Fed started tightening policy to 4-5% again commodities would lose their appeal and paper money would gain in attractiveness to savers and investors. The savers would be happier but the farmers would be complaining, as you would if the price of your produce collapsed.
"Speculators" are the whipping boys whenever the price of oil goes up, (just as they are when equities go down - "evil short sellers and hedge funds"!) but speculators are only responding to increased long term investment demand or supply forces. This is pretty obvious really because a speculator by definition will not take physical delivery of an underlying - at that point he probably becomes an investor.
A speculator is doing his job well if he is able to make money because his average buy price is less than his average sell price, so he is effectively "smoothing" out the price movements, assisting in some kind of semi-mean reversion process, nudging price towards some kind of illusory equilibrium price, in between price extremes. Earning a profit to enable him to stay in business is the reward for good judgement and prudent risk management. You need both.
And so the most competent speculators, by staying in business, continue to assist in the price discovery process, whereas the guys that buy oil when it gets out of line with fundamentals (working against the farmer at low prices by selling too low, and against the consumer at high prices by buying too high) are put out of business...
Hope this helps you on your journey.
With due respect, it sounds like you've got a long way to go in your quest for knowledge. But it's an interesting journey so good luck.
I could give a succession of detailed replies to address each of your points but I'm not.
However, a question for you to ponder...
Which is more acceptable - A farmer going out of business because prices are deemed "too low", or a consumer having less or no money in his pocket because prices are deemed "too high"? And who gets to decide this? It becomes a very political matter, depending on your viewpoint.
Note that a structural change occurred in the last decade that was in large part the unintended consequence of Government/Fed policies to devalue paper currencies (printing more dollars to reduce the real value of debt in excessively indebted economies). Clearly, you make paper dollars worth less by increasing their supply via QE money printing, and increase the relative attractiveness of real assets and inflation hedges such as commodities. Commodities have developed an underlying appeal to long term investors because they benefit from excessive Fed money printing and sub-1% interest rates. If the Fed started tightening policy to 4-5% again commodities would lose their appeal and paper money would gain in attractiveness to savers and investors. The savers would be happier but the farmers would be complaining, as you would if the price of your produce collapsed.
"Speculators" are the whipping boys whenever the price of oil goes up, (just as they are when equities go down - "evil short sellers and hedge funds"!) but speculators are only responding to increased long term investment demand or supply forces. This is pretty obvious really because a speculator by definition will not take physical delivery of an underlying - at that point he probably becomes an investor.
A speculator is doing his job well if he is able to make money because his average buy price is less than his average sell price, so he is effectively "smoothing" out the price movements, assisting in some kind of semi-mean reversion process, nudging price towards some kind of illusory equilibrium price, in between price extremes. Earning a profit to enable him to stay in business is the reward for good judgement and prudent risk management. You need both.
And so the most competent speculators, by staying in business, continue to assist in the price discovery process, whereas the guys that buy oil when it gets out of line with fundamentals (working against the farmer at low prices by selling too low, and against the consumer at high prices by buying too high) are put out of business...
Hope this helps you on your journey.
