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Like the credit bubble, this speculative bubble in commodities has badly distorted the workings of key markets and sectors of the global economy. Speculators always have played a prominent role in commodities markets, but in the past year, they have overwhelmed them, causing a dramatic increase in trading volume, volatility and prices, and disrupting many of the normal relationships between producers and end-users. To meet the needs of these investors, Wall Street and Chicago’s commodities houses came up with all sorts of new vehicles, including exchange-traded funds, index funds and structured investment vehicles, the commodities equivalent of mortgage pools and asset-backed securities. On many commodities markets these days, the cash or spot markets often are below the futures market, a condition known as “contango” that usually signals that something other than market fundamentals are at play. Indeed, the only people who don’t believe speculation is driving a commodities bubble are the big commodity traders and the commodities exchanges, which are profiting handsomely from the soaring prices and trading volumes, and the regulators at the Commodities Futures Trading Commission, where economists cannot seem to find statistical evidence that financial investors have had much of an impact on commodity prices. read more

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