Speculators distort prices ? Well yes, of course they do but you can't have it both ways......

Tuesday 28th April 2015

 Speculators distort prices ? Well yes, of course they do but you can't have it both ways......

"Rusal battles LME on aluminium price" , The Financial Times, p.30

News that Vladislav Soloviev, boss of troubled aluminium giant Rusal, has accused the London Metal Exchange of allowing  "money-market traders", speculators to you and me, to artificially depress the price of the metal by 30%. Given his company's difficulties, Mr Soloviev clearly has an axe to grind but his comments open up the wider debate over the desirability or otherwise of speculators and their effect on prices.

Particularly since the introduction of any number of highly-leveraged derivative products, all markets are subject to sometimes wild exaggerations in price movements brought about by the actions of speculators but this applies most obviously to commodity markets. It's certainly true that prices do not always reflect the fundamentals, essentially supply and demand. The original derivatives, commodity futures, evolved centuries ago in the coffee houses of London to allow both producers and consumers to hedge their risk as cargoes made their long journey back from far-flung corners of the globe.  With that in mind, authorities have always acted in the best interests of the major players  when they consider outsiders to be endangering the stability of the market. Famous (infamous?) more recent examples would include silver, copper and cocoa markets, and those involved on the speculator side would have been left in little doubt as to which side the exchanges favoured.

There are measures available to the authorities in the fight against market manipulation, but they need to be very careful in judging whether or how much to rein in speculators. As has always been the case, they provide the essential liquidity that allows producers and consumers to hedge risk and operate successfully, a fact all too easily forgotten when markets don't go your way. Besides, would it be too presumptuous to suggest that Mr Soloviev would have been only too happy to sell his metal had speculators artificially inflated prices rather than depressed them ?