Commodities and the Evil Speculators

When commodity prices rise to the point that constituents start calling their congressperson, something has to be done; and that something is to:

1. Blame someone other than politicians for the problem,
2. Attack the "symptom" (rising prices) rather than the cause and
3. Focus on and talk about the benefits (winners) and ignore the negative consequences (losers.)

That is exactly what the government did last week when they raised margin requirements on silver five times in five days increasing the total margin requirements by 84%; and then raised the margin requirements on oil.

The net result of their "margin increase" policy will be to disrupt the market for a short period of time (creating some winners and some losers,) BUT that short-sighted policy does not change the long-term trend of rising commodity prices because it does not attack the "real cause" of rising commodity prices.

In addition to supply and demand issues, the government and the Federal Reserve are addicted to borrowing and printing money as a way to stay in office. Increasing the money supply (demand) without increasing supply devalues the dollar. This means commodities prices raise to compensate for the devalued dollar. It's pretty simple.

If you are an investor, this correlation is an opportunity to "speculate." But, if the government stopped printing money or contracted the money supply, commodity prices would fall. However, if you think speculation is bad now, wait until people recognize that higher commodity prices are not "transitory." Then, commodity speculation will consume almost everyone like it did housing ("You don't flip") a few years ago.

May 12, 2011