CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

23.3 THE ROLE OF INVESTORS IN COMMODITY MARKETS

Noncommercial investors in commodity markets have historically been called speculators. The term speculation is applied differently in commodity markets vis-à-vis the traditional financial markets, where it has negative connotations because it has often been viewed as a trading activity not based on economic necessity, one that may causes market distortions that harm commercial users of the futures markets as well as other market participants, including certain investors. It is generally accepted that speculators in commodity markets play an important economic function because their investment adds liquidity to the market, which makes it easier for other participants to manage risk. This function of speculators is often compared to insurance, in that speculators are willing to accept risks that commercial firms would prefer not to bear. The following definitions of a speculator and of the quantity of a commodity held by a speculator (speculative stocks) come from one of the seminal articles on commodity markets, entitled “Speculation and Economic Stability” (Kaldor 1939).

Speculation . . . may be defined as the purchase (or sale) of goods with a view to re-sale (re-purchase) at a later date, where the motive behind such action is the expectation of a change in the relevant prices . . . and not a gain accruing through their use, or any kind of transformation effected in them or their transfer between different markets.

Speculative ...