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Speculation and Commodity Price Dynamics Stephan Schulmeister

Speculation and Commodity Price Dynamics Stephan Schulmeister Workshop „Financial Crash, Food Speculation and Development“ Berlin, 17th November, 2008. Overview. Theoretical basics Price dynamics Supply & demand conditions in the markets for physical commodities

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Speculation and Commodity Price Dynamics Stephan Schulmeister

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  1. Speculation and Commodity Price Dynamics Stephan Schulmeister Workshop „Financial Crash, Food Speculation and Development“ Berlin, 17th November, 2008

  2. Overview • Theoretical basics • Price dynamics • Supply & demand conditions in the markets for physical commodities • Technical trading and price dynamics • Dynamics of exchange rates and stock prices • Trading volume in overall financial markets • Concept of a general financial transaction tax

  3. “Fundamentalist hypothesis” • Economic Mainstream • Supply and demand in spot markets • Rational actors in derivatives markets > • Price discovery process > • Destabilizing speculation only a temporary phenomenon > • No persistent/systematic mispricing • Holds for asset prices in general

  4. “Bull-bear hypothesis” • Fundamentals matter • Speculation as driving force • (Fundamental) News > overshooting • Trend-following trading systems • Feed-back upon price pattern > • (Commodity) Prices move in trends > • “Manic-depressive” fluctuations • Typical for asset prices in general

  5. Crude oil futures price

  6. Corn futures price

  7. Wheat futures price

  8. Rice futures price

  9. Market for physical crude oil

  10. Crude oil prices

  11. Market for physical corn

  12. Market for physical wheat

  13. Market for physical rice

  14. Commodity futures prices

  15. Commodity derivatives trading

  16. Trend-following trading system

  17. Trading signals and oil price dynamics

  18. Dollar exchange rate and oil price fluctuations

  19. Stock prices and real accumulation Germany Source: Wifo-databank.

  20. Profitability and price effects of technical commodity futures trading • 1092 models tested over 1989/2008 (June) • Annual average return 12.7% (oil), 3.8% (corn), 2.4% (wheat) and 12.6% (rice). • Much higher during 2007/2008 • Leverage factor ~15 • Profitability due to “trending” • Aggregate trading > strengthens “trending”

  21. Additional evidence on the role of commodity futures speculation • Commodity derivatives funds rose from 13 bill.$ (2003) to 260 bill. $. • Main actors: Hedge funds, commodity index funds, banks (Goldman, Morgan, Deutsche). • Also an increasing number of amateurs. • Profits of Goldman and Morgan from commodity trading 2007: 7,5 bill. $. • Trading activities

  22. Daily US dollar/euro exchange rate 1999-2005

  23. Intraday US dollar/euro exchange rates, June, 6-13, 2003

  24. Technical trading signals for S&P 500 futures contract

  25. Overall financial transactions in the world economy

  26. Financial transactions in the world economy by instruments

  27. Some conclusions • Discrepancy real/financial transactions • Speculation in derivatives grows fastest • Hedging almost irrelevant • Short-term price runs accumulate to • „Manic-depressive“ fluctuations of the most important prices > • Depresses real economy • A small FTT would affect only very short-term transactions with high leverage > • A FTT would dampen asset price fluctuations.

  28. A general transaction tax • Tax base: • All transactions of „financial assets“ • Spot und derivatives • On exchanges and „over-the-counter“ (OTC) • Three tax rates: 0,1%, 0,05%, 0,01% of asset value • Three scenarios about the reduction of trading due to the FTT (differentiated by types of instruments)

  29. FTT receipts at a rate of 0.01

  30. Steps towards the realization of a FTT • Step 1: Transactions on organized exchanges in EU. • Step 2: OTC-transactions within Euro area. • Step 3: Global OTC-transactions (including foreign exchange). • Administrative costs extremely low due to electronic settlement systems. • FTT would be highly concentrated on countries with big financial centers. • Tax circumvention not (very) relevant due to low tax rate and network externalities (> successful stamp duty of even 0.5% in UK).

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