The 2008 commodity price boom: did speculation play a role?

Abstract

In the wake of the commodity boom and bust, a number of articles and reports have made the case that the surge in commodity prices and the subsequent fall were caused by speculation, particularly by index funds. This claim is reviewed and an overview of the arguments is presented. By way of background, particular features of commodity markets in general and of futures markets in particular are reviewed. It is argued that some of the support for the speculation hypothesis derives from a failure to appreciate that price spikes have always formed a feature of commodity markets and that commodity markets have a characteristic that does not exist to the same extent in other markets, namely the possibility to sell short. Moreover, proponents of the speculation hypothesis do not offer any credible explanation of how activities by index funds on futures markets led to rising prices in markets subject to backwardation. Some simple statistical and anecdotal evidence is presented that contradicts the speculation hypothesis. Finally, published studies are briefly reviewed, and it is concluded that most authoritative econometric studies reject the speculation hypothesis. Those that do not, suffer from shortcomings with respect to methodology or are inconclusive. It therefore appears that there is very limited basis for the arguments that the nature of commodity markets has changed or that speculators, particularly index funds, were responsible for the commodity price increases in 2008.