Commodity Index Investing: Speculation or Diversification?

Abstract

A number of seemingly unrelated commodities experienced simultaneous price spikes in 2007 and 2008. Congress investigated the increase in prices and concluded that the price increases were attributable not to supply and demand fundamentals but rather excessive speculation from commodity index investing. In this article, the authors evaluate whether commodity index investing is a disruptive force in commodity futures markets. Using the U.S. Commodity Futures Trading Commission’s Commitments of Traders reports, the authors conclude that because of its passive, long-only nature, commodity index investing is not speculation. In addition, the authors conclude that commodity index flows, whether due to rolling over existing futures positions or establishing new ones, have little impact on futures prices.

TOPICS: Mutual funds/passive investing/indexing, commodities, financial crises and financial market history