Are Investment Instruments Creating a Commodity Crisis?

Posted by Patrick O'Connor on 5/13/08 2:49 pm

During the past few years there has been an explosion of new investment instruments that have allowed investors to participate in the commodity markets unlike ever before.  This new source of buying pressure on the long side (about $250 billion) is causing most of the commodity inflation we’re experiencing today, according to the article “The Looming Commodity Crisis” by Jeff Korzenik at MarketWatch.

Here are some quotes from the article:

“The problem is that the investment capital is too large relative to the size of the underlying commodity markets.”

“A recent move by pension giant Calpers to commit to raise their commodity exposure to $7 billion (from less than $400 million) underscores this growing trend.  All this money is directed to roughly two dozen futures contracts.”

Mr. Korzenik suggests that regulatory intervention is needed to fix the imbalance.  I respectfully disagree.  Instead, I think there should be more shorting instruments made available to put downward pressure on many of these commodities.  That’s a solution that would limit much of the one-sided investing that’s going on.

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