I love Randi and agree with 90%+ of what she says on the air but I was really bothered by something I heard on the show the other day. Here is Randi going off about Oil speculators driving up the price of oil and a lack of regulation...And I'm really into it and agreeing. Of course we were interupted by a commercial (have to pay the bills), but I was surprised what do I hear but Randi's voice encouraging me to call some 1-800 number so I can become a Gold speculator! Now Randi, I know you don't like those hypocritical republicans...can you set the record straight? Is commodity speculating ok or not?

Apples and oranges. The oil market is being manipulated by some very wealthy people, hedge funds, and such. This directly causes hardship to common people and the economy. Some say the gold market is also being manipulated, by the central bankers trying to keep a lid on it so people do not panic about the dollar! Bottom line, gold, unlike food or oil, is not an essential commodity, so buying a little gold to protect oneself from the declining dollar is not comparable to exploiting the Enron loophole!

I don't need Gold to drive to work, plant food etcetera.......If people want to play the comodities market they can but Oil affects so many people in so many ways that there should be some type of regulation re; speculation on it and food types (corn, wheat) so that the wealthy and connected can't corner the market.

If you corner the market on Gold, I will do as I do now........I won't buy any.............

Gold isn't "good" either. Driving up commodity prices to protect one's self from failing stocks is a self-fulfilling prophecy.

The Hunt brothers helped create a "silver bubble" in the 1970s.

http://www.buyandhold.com/bh/en/education/.../hunt_bros.html

So, yes, if you read this article, you'll see speculators twisting the value of any commodity, even gold and silver, can have negative consequences.

What people are missing in this blame the speculator frenzy is that there are two parts to the oil market (actually 3 but not going there now), the future and spot markets. The future market where speculators play, is really a financial risk reduction tool for businesses. The spot market is where the actual buying and selling of oil occurs, and plays by (or should play by) the same rules of any free market, that is, people openly compete for the best price they can find, whether they are seller or buyer.

So why is no one blaming the spot market where the oil actually trades hands? Because they believe spot players blindly follow the lead of futures players toward higher prices. But that's not the way it works (or its suppose to work). The spot players should more or less discover the price thru price competition, independently of the futures market. The result of this is that the futures prices can't go higher unless the spot prices go higher as well.

Remember our speculator? Say this guy bets in a month from now the price will be $150. When that date arrives the actual price is $160. Guess who came up with the $160 figure? Not the speculator, it's the spot market players. This is what has been happening over the recent months. The speculators have actually been underestimating the price of future oil. And they get blamed?

One other thing, you might wonder: who are these spot players? They're suppliers and buyers of actual, physical oil, otherwise known as oil companies.

So, who ya gonna blame?

Wow! You don't buy any gold? I guess you don't have a cellphone, computer or car then? People might not realize but gold is a big part of the cost associated with today's electronics market. Yes if you didn't have gold you would not be able to drive to work.

Unfortunately, it's not working that way. The spot market is basing prices on the futures market. It was in Mike Masters' testimony, and it's outlined on the cftc website. Search my recent posts if you like, I had links in one of them.

I'm not sure where the gold in a car might be but I have never bought a piece of jewellery, ring, earrings etc in my life for myself or anyone else.........can we talk diamonds for a minute...........I recall 10 yrs or so ago there was someone on a talk show who had conducted a survey amongst professional Jewllery types and they had a moisinite? material that 9 out 10 pro's thought was a diamond and it's cost was 5% of a diamond. If they can't tell the difference, how could I ever...........?

I jenrelly don't dispute Randi often, but I wonder what she means by the 'speculators.' I usually think of them as intermediate (nonproducers) who are looking for $$ rather than being in the business of the commodity they're messing with, usually on margin.

If so, that doesn't make a gold purchaser a speculator. They are holding a valuable material but are not running in/out with the market.

I tend to think the intermediate twiddlers in the oil market buffer out the price. When the price spikes, supply goes up, demand goes down. Someone holding oil reserves on margin adds to the increased supply, driving the prices back down. If speculators accurately predict a decrease in supply in the future, they drive the prices up NOW, cutting demand NOW and increasing supply NOW. When the supply decrease - such as e.g. a Gulf Hurricane knocks out refinery - the "leading" higher prices makes the market LESS damaged by the knockout of supply. Such is matchbook economics - may not work at home.

I've been considering saving up for a little gold chunk or two to put in a safe in case the currency goes boom.

I take it that's not what Randi's sponsor is offering?

Anyone know if it's a good idea?

My thoughts are: In unstable times, or when there is an economic collapse a few banks will still be around. Things with international value like Gold will rise dramatically against money backed assets (like real estate). I think having a bar of gold at just such a time could buy a lot of good deeds, or maybe just a few property deeds - you make nice by using said cheaply earned properties as shelters for friends and family.

Is this a sound idea?

The two market prices have to stay together to a certain degree, otherwise someone could exploit the difference. If the futures price were too great, I could buy oil on the spot market, sell a futures contract on that oil and keep the oil in storage until the delivery date. If the contract price was sufficiently large, it would cover the original price of the oil, plus storage costs, plus a profit. Gee, that sounds like something a speculator (in the generic sense) would do.

Here's an overview of the paper I used for the above:
http://www.econbrowser.com/archives/2008/0...standing_c.html
Here's the actual paper:
http://dss.ucsd.edu/~jhamilto/understand_oil.pdf

Other than that, spot players have room to negotiate prices as your CFTC info reveals:


So what about Michael Masters testimony?

I don't trust this guy (Joe Lieberman aka McCain's shadow brought him in). I'd have to go back and see it in context. It seems misleading to me. Remember, this is the guy who confused paper and physical barrels.

Paine - Good point on the arbitrage possibilities keeping the futures market and spot market within storage and possibly transfer costs. I like the reference as well.

IMHO a speculator is anyone who buys (or sells) a commodity or a future of a commodity with the expectation of making money off that purchase through resell and isn't adding value to the product prior to distribution (in the form of a product or fuel or service).

The issue I see is with people buying highly leveraged positions on margin. This is what led to the great depression. The hedge funds have now moved all their CDO money into oil futures and it is driving up the price. Eventually poof and it will crash and somehow we the people will get screwed bailing out the guys who are making $1,000,000,000 a year and paying 15% taxes...I think that's the issue.

People do hedge against dollar moves by buying gold or other commodities. It would have been a poor long term investment over the past 30 years however. Not advised as a major portion of your investment portfolio over the long haul.

I still think it's hypocritical. But now I'm also bothered by quite a few commercials on Green960.

Paine, your scenario doesn't change the fact the the "price discovery" function is being performed by the futures market, and even if there is "room to negotiate"a round the futures price, it doesn't change the fact that a rise in futures price is guaranteed to be reflected in the spot price, since differentials are being used.

You'd have to point out Masters' error. He seems to have a very good handle on the concepts.

Buying gold is a hedge in the market. Understand that the "speculators" now with the internet include little guys too. The internet has changed the investment scene and people will invest in what is working. All commodities, not just oil are skyrocketing. They would not invest if the rest of the story were not in place. Cheap oil is gone. It is a limited resource and drives the world. There is a world demand which is on fire for energy, materials, etc. The emerging markets story is what is driving the US and European stock markets right now. If a company does not have international exposure, it is tanking. The reason? It's because of the Fed. The Fed allowed the fed rate to drop to 1% in 2003 which created the credit bubble. (Deregulation) Now the Fed has cut rates 325 points since last summer to create liquidity in a credit crisis and the dollar has tanked. Oil is priced in dollars and the decline of the dollar has shot the price of oil up. It takes more dollars for the same barrel of oil. That is why it is happening right now. The credit bubble, the interest rate decreases, and the Fed being pressured by who is in the White House are all tied in to the price of oil.

You have fallen under Michael Masters' misleading, manipulative, self-serving statement. He hopes to convince everyone that the futures market is solely responsible for the price run-up, so Congress will regulate it and the money will flee into his portfolio. He virtually said as much himself. What Michael Masters says only makes sense if your Michael Masters.

Futures are derived from the primary market which is the spot market:
http://www.coolavenues.com/forums/showthread.php?t=16724

That's not to say the two markets don't interact, they do, but it's the combination of spot and future that discovers the price, not solely the futures market as Masters would gladly lead you to believe.
Here's EIA's take on it:

So, this brings me back to how the spot market stops a price run-up in the futures market:
http://www.clevelandfed.org/Research/Comme...2004/Decnew.pdf

The key sentence there is, "This puts a bound on the futures price". The bound is the spot market price.
Therefore, unless spot players follow futures players toward higher prices the run-up wouldn't be possible. So why is no one blaming the spot players (oil companies)?