Commodity Index Investing: Speculation or Diversification?

Abstract

A number of seemingly unrelated commodities experienced simultaneous price spikes recently. Congress investigated the increase in prices and concluded that the price increases were not attributable to fundamentals but rather to commodity index investing. The purpose of this study is to evaluate whether commodity index investing is a disruptive force in commodity futures market. We conclude that: (a) due to its passive, long-only nature, commodity index investing is not speculation and (b) commodity index flows, whether due to rolling over existing futures positions or establishing new ones, have little impact on futures prices.