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

    ETF Analysis: ProShares UltraPro Short S&P500

    Find out information about the ProShares UltraPro Short S&P 500 exchange-traded fund, and learn detailed analysis of its characteristics and suitability.
  2. Mutual Funds & ETFs

    ETF Analysis: SPDR Barclays Investment Grd Fl Rt

    Learn more about the SPDR Barclays Investment Grade Floating Rate Fund, which tracks an index of highly rated floating debt securities.
  3. Mutual Funds & ETFs

    ETF Analysis: ALPS Medical Breakthroughs

    Learn more about a unique and innovative exchange-traded fund (ETF) in the biotechnology industry: the ALPS Medical Breakthroughs Fund.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares US Healthcare

    Learn about the iShares U.S. Healthcare exchange-traded fund, which invests in a wide range of health care providers, hospitals and home care facilities.
  5. Mutual Funds & ETFs

    Top 5 Japan Mutual Funds

    Discover five of the most popular and best-performing mutual funds offering investors direct exposure to equities of Japanese companies.
  6. Mutual Funds & ETFs

    ETF Analysis: BioShares Biotechnology Clinical Trials

    Learn more about the BioShares Biotechnology Clinical Trials Fund, a new and innovative fund focusing on breakthroughs in the health industry.
  7. Mutual Funds & ETFs

    ETF Analysis: First Trust NYSE Arca Biotech

    Learn more about the First Trust NYSE Arca Biotechnology Fund, a highly rated exchange-traded fund in the biotech space.
  8. Mutual Funds & ETFs

    ETF Analysis: PowerShares KBW Bank

    Consider an examination and analysis of the PowerShares KBW Bank Portfolio ETF, considered one of the primary financial sector ETFs.
  9. Chart Advisor

    3 Ways to Trade the Rising Volatility

    With volatility increasing in the markets, many are turning to these three volatility-capturing exchange-traded products.
  10. Term

    Understanding Total Returns

    Total return measures the rate of return earned from an investment over a period of time.
RELATED TERMS
  1. Derivative

    A security with a price that is dependent upon or derived from ...
  2. Real Estate Investment Trust - ...

    A REIT is a type of security that invests in real estate through ...
  3. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  4. Ginnie Mae Pass Through

    A type of investment issued by the Government National Mortgage ...
  5. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  6. Agency Swap Program

    A form of securitization whereby single-family residential mortgages ...
RELATED FAQS
  1. Where do penny stocks trade?

    Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
  2. Where can I buy penny stocks?

    Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How are American Depository Receipts (ADRs) priced?

    The price of an American depositary receipt (ADR) is determined by the bank or other financial institution that issues it. ... Read Full Answer >>
  6. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>

You May Also Like

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!