For students of the investment markets, commodities are a fascinating subject. When the price of gold rockets to $1,900 per troy ounce, politicians and consumers don't start the blame game and anybody holding the precious yellow metal rejoices.

When oil rises, something entirely different happens. There's a collective mission to right the wrong. One report estimates that speculation in the energy markets may account for as much as $600 per year in extra energy costs for the average household. "Consumers are being robbed of their hard earned dollars," say the politicians, and attention is instantly turned to the speculators of the market. Are speculators controlling the price of commodities and could they be using exchange-traded funds to do it?

What Exactly Is a Commodities Speculator?
When farmers, drillers or other people dealing in physical assets like grains, oil, corn and orange juice produce a product, a lot of money is invested into its production. They feel better about producing the product if they know they have a buyer and a set price. Contracts that require the producer to deliver the product on a certain date, for a certain price, benefit both the buyer and seller because each party can forecast future earnings.

A speculator is somebody who neither produces nor purchases the commodity. In most cases, a speculator is a sophisticated investor who buys and sells these contracts before they require that the investor sell or take delivery of the actual asset. By purchasing a contract at one price and selling at a higher price, they can profit. Of course, some speculators do take delivery, but the often vilified speculator isn't holding thousands of barrels of oil in most cases.

You Might Be a Speculator
Because of the wildly expanding ETF market, there's a good chance that you are a commodities speculator. If you own the second largest ETF, the SPDR Gold Trust (GLD), the United States Natural Gas Fund (UNG) or the United States Oil Fund (USO), you're a commodities speculator. However, your relatively small investment in the commodities market isn't having an impact on the global markets, and in most cases the fund you own probably isn't moving the market as much as some believe.

In early 2012, the SPDR Gold Trust held over 41 million ounces of gold in a vault in London, but according to Jason Toussaint, principal executive officer of World Gold Trust Services, GLD and other Gold backed ETFs only represent 10% of the world gold demand and that small piece doesn't have a profound effect on the markets.

But What About Oil?
Let's be honest. We're not worried about gold speculators because we expect jewelry to be expensive and we don't rely on gold to power our cars to get us to work. Oil is what we're concerned about. In 2008, when oil reached a high of $147 per barrel, the media was full of reports about speculators driving the price higher. Some reviews could find no direct evidence that speculators were to blame, but thanks to some leaked Wikileaks documents, there may be some evidence to support the claim.

When oil prices were heading higher in 2008, the Bush Administration asked Saudi oil ministers to bump up production of oil to combat the prices, but Saudi Oil Minister Ali al Naimi said that they were having trouble finding buyers for their oil at current levels. If oil prices are based solely on supply and demand and the Saudis said that there was plenty of supply, why were prices at record highs?

Some point to the fact that oil speculators account for 64% of all oil contracts traded on the markets and those contracts are in the hands of a small amount of players. Goldman Sachs estimates that when contracts representing one million barrels are opened, the price rises by 10 cents.

The United States Oil ETF holds contracts representing 13.5 million barrels of oil, a small percentage of the total traded contracts, but as more ETFs enter the market, experts believe that these popular investment products will have a much larger effect on the price of commodities.

The Bottom Line
As oil prices rise above the $100 mark, politicians and consumers renew their cries to rein in speculators. Although exchange-traded funds are one of the fastest growing products in the investment markets, and many blame the rising price and volatility of commodities on ETFs, it still remains exceedingly difficult to separate the speculators from the physical producers and buyers. For now, all we're left with is a Wikileaks document.

Related Articles
  1. Mutual Funds & ETFs

    Top 3 Muni California Mutual Funds

    Discover analyses of the top three California municipal bond mutual funds, and learn about their characteristics, historical performance and suitability.
  2. Mutual Funds & ETFs

    Top 3 Japanese Bond ETFs

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and corporate bonds issued by developed countries, including Japan.
  3. Taxes

    Here's How to Deduct Your Stock Losses From Your Tax Bill

    Learn the proper procedure for deducting stock investing losses, and get some tips on how to strategically take losses to lower your income tax bill.
  4. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  5. Mutual Funds & ETFs

    Top 4 Global Real Estate Mutual Funds

    Read about four of the best global real estate mutual funds, which invest in the securities of real estate companies or real estate investment trusts (REITs).
  6. Savings

    Become Your Own Financial Advisor

    If you have some financial know-how, you don’t have to hire someone to advise you on investments. This tutorial will help you set goals – and get started.
  7. Professionals

    Why Near-Retirees Shouldn't Sweat the Volatility

    With the stock market bumpy, some folks nearing retirement might be nervous. Here's how to create some wiggle room for your portfolio.
  8. Professionals

    Top 5 Highest Paid Hedge Fund Managers

    Understand what a hedge fund is and why hedge fund managers make so much money. Learn about the top 5 highest paid hedge fund managers.
  9. Investing Basics

    6 Reasons Hedge Funds Underperform

    Understand the hedge fund industry and why it has grown exponentially since 1995. Learn about the top six reasons why the industry underperforms.
  10. Stock Analysis

    3 Solar Stocks to Add to Your Portfolio

    Understand the growth and challenges of the renewable energy market and its success in 2015. Learn about the top three energy stocks to add to a portfolio.
  1. What licenses does a hedge fund manager need to have?

    A hedge fund manager does not necessarily need any specific license to operate a fund, but depending on the type of investments ... Read Full Answer >>
  2. What do hedge fund analysts do?

    A hedge fund analyst primarily provides support to a portfolio manager on how to best structure the hedge fund's investment ... Read Full Answer >>
  3. What are the main kinds of annuities?

    There are two broad categories of annuity: fixed and variable. These categories refer to the manner in which the investment ... Read Full Answer >>
  4. What are the risks of rolling my 401(k) into an annuity?

    Though the appeal of having guaranteed income after retirement is undeniable, there are actually a number of risks to consider ... Read Full Answer >>
  5. How do I get out of my annuity and transfer to a new one?

    If you decide your current annuity is not for you, there is nothing stopping you from transferring your investment to a new ... Read Full Answer >>
  6. How often do mutual funds pay capital gains?

    The frequency with which mutual funds pay capital gains varies. However, funds that generate a profit within a given year ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  2. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  3. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  4. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  5. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  6. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!