Commodities too rich by half: Merrill
ROMA LUCIW
Globe and Mail Update
Everyone agrees that speculators have invaded commodity markets, but quantifying how much they are actually dictating prices is a whole lot tougher.
Merrill Lynch & Co. strategist Richard Bernstein took a stab at it in a report Thursday by comparing the spot prices of commodities that have exchange-listed futures with those of commodities that do not have listed futures.
His conclusion? Commodity prices at the end of April were about 50 per cent above where they would be if based solely on fundamentals.
At the end of March, the speculative premium was at 30 per cent, already the largest premium in the history of his data, Mr. Bernstein said. The 20 percentage-point jump was triggered by the U.S. Federal Reserve, he said, when the bank hinted that it might stop raising interest rates.
Mr. Bernstein said that had the Fed suggested that rates would continue to rise, the speculative premium would have followed historical patterns and reverted to the mean.
With a 50-per-cent premium built into commodity markets, liquidity is probably the main driver of pricing, he said. "It should be no surprise, therefore, that commodities have recently fallen as the fed funds futures markets have started to discount a higher probability of a Fed tightening.”
Mr. Bernstein's theory is that speculators are more likely to be active in the futures markets than in the actual physical commodity markets and that spot prices of non-listed commodities were more likely to be driven by actual fundamental demand.
Therefore, the difference in the performance between listed and non-listed commodities would provide a measurement of the speculative premium built into commodity prices, above that set by fundamental demand.
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