marketsThe silver futures market is over 20 times larger than global silver production.
The oil futures market is similarly distorted, Global oil production and consumption has not changed significantly in the last five years as some have increased and other decreased on both ends. However, the price of oil has gone up tremendously. Surely speculative trading seems to be responsible.
Speculators seem to determine the price of commodities, not supply and demand.
Is that an illusion or reality?
Of course speculators play a role in commodity markets. However, it is a fallacy to argue that if the production and consumption quantities of a commodity have not changed significantly then a large increase in its price must be due to speculation. All that can be inferred is that supply and/or demand have shifted so that the curves intersect at a similar quantity but at a different price (I ignore here complications arising from the possibility of holding stocks). It could be that:
The supply curve has shifted upwards, and demand is inelastic.
The demand curve has shifted upwards, and supply is inelastic.
Both the supply and the demand curves have shifted upwards.
In each case the shift(s) could be due to non-speculative reasons. For supply these could be increases in extraction costs, or disruption due to political circumstances, For demand they could be increased incomes or reduced supply of substitutes.
It should also be borne in mind that the actors in a market cannot be neatly divided into speculators and what might be termed “normal traders”. An oil-producing country with finite reserves, deciding how much to extract in a given year can hardly avoid taking into account its view of how oil prices might change in future years. The Hotelling Model, though it has been criticised,gives some insight into the economic considerations that might drive such a country’s extraction policy.
I think Adams answer summarizes nicely but I would take a different approach.
If i buy a ton of silver speculating that I can sell that silver for more in a few months than I paid for it, that is still demand.
For me to buy that ton of silver someone (or several someones) have to be willing to sell that ton of silver to me. That is supply.
If the speculators get out of the market the price would certain collapse (temporarily) but it would be far worse if the actual physical consumers of the commodity exited the market. That would cause a price collapse that is not likely to recover since there would be an increasing supply but no consumption of that supply. Fortunately neither party is likely to exit the market any time in the foreseeable future.
People buy gold jewelry in part as a reserve of value. To classify demand according to what the buyer has in her mind is not part of the science of economics.
Speculators are people too ;-)
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