Commodities and Commodity Futures Trading (Series): Why Do Traders Trade Commodities?
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The Blog Entry that Accompanies this Video is at: http://investorandtrader.blogspot.com/2010/02/commodities-trading-and-futures.html
My Daily Blog is at: http://investorandtrader.blogspot.com
Free Issue of Airelons Market Tactics: http://davianletter.com/articles/2009/12/13/airelons-market-tactics-4
Airelon’s Market Tactics Newsletter: http://davianletter.com/amt
This vlog entry is a continuation in a series of videos, the “Commodities Trading and Futures Speculation”, and is continued from the previous entry.
Introduction: I discussed some of the myths regarding commodities speculation, and introduce the entire series.
The Reason for the Markets Existence: We discussed that the commodity futures markets exist, to allow companies, farmers, and others involved in production within the economy to hedge themselves against catastrophic losses. This in turn, keeps unemployment lower, and reduces volatility in the economy.
So why are traders within the commodities market? We discuss this topic in the following vlog entry …
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Note: This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have over 13 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders who should make their own decisions based off their own research, and tolerance for risk.
Duration : 0:6:40
22 Responses to “Commodities and Commodity Futures Trading (Series): Why Do Traders Trade Commodities?”
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July 7th, 2010 at 6:48 am
Well I think this …
Well I think this needs more study on my part. I am sure some academic somewhere has created a model. Either way I think we both agree that politicians will blame the traders rather than dealing with the root issue – peak oil.
The difference between us is that you don’t think traders push the price around too much. I think they may be able to and hope they can. Because if they bet right they will make money and price discovery will happen faster, if they are wrong the market will break them.
July 7th, 2010 at 6:48 am
Ah no mate, I don’t …
Ah no mate, I don’t see it as an argument mate at all. Enjoying the discussion.
Well, it’s not that the prices won’t rise because of the fundamentals. They will. The traders just provide future liquidity while that occurs. The traders can’t make it go up. The economic fundamentals do that. Less oil = higher oil prices. Traders will just make it easier for commercial interests to hedge properly.
I just hope that I don’t get demonized when the inevitable happens.
July 7th, 2010 at 6:48 am
I’ll have a look at …
I’ll have a look at the CoT report Airelon. I am a new investor (2 years) so I’m not going argue against you dogmatically. However, I hope you’re wrong. We are running out of oil – I hope speculators can bid it up so that the economy is forced to adjust to high oil prices now when there is time, rather than later.
July 7th, 2010 at 6:48 am
True enough. As a …
True enough. As a matter of fact, the vlog that will come out today talks about that.
Because when the govt started talking about screwing with the futures markets? Those large institutions started going to the spot market, and did just that.
July 7th, 2010 at 6:48 am
To the point price …
To the point price will be whatever demand will support. I prefer that many (retailers) partake of the profits than few (massive institutions) gather it all.
July 7th, 2010 at 6:48 am
From the blog entry …
From the blog entry that accompanies this vlog:
If those contract cannot be traded with ease on the market, then the hedging interests may not be able to enter the positions; in order to properly hedge themselves. With traders present it becomes much easier to protect themselves, at the exact price, time and size that they wish to weight their hedge. Without them, they can’t do so easily, and the whole purpose of the market breaks down.
July 7th, 2010 at 6:48 am
Thanks much.
And …
Thanks much.
And amen to that …
July 7th, 2010 at 6:48 am
Thanks it great …
Thanks it great having you here.
Personally I feel retail traders and investors are “true tax”(my term). The only way to get your fair share of the pie is to be part of the game. The government ain’t gonna do it.
July 7th, 2010 at 6:48 am
If you look at the …
If you look at the CoT (commitment of traders) report each week, for as long as the commodity markets have ever existed, the commercial interests have always … always made up exactly, to the decimal point – 1/3 of the market
July 7th, 2010 at 6:48 am
I hear you, up …
I hear you, up until “major players taking up a major portion of the market”
Let’s remember that you CANNOT buy or sell a contract, unless there is someone else to take up the other side of the trade. It’s not like other markets.
Just the very structure of the market is that the commercial interests who hedge MUST – by definition – always make up 1/3 of the market.
July 7th, 2010 at 6:48 am
I’ll talk about …
I’ll talk about this in the next video.
Traders are providing liquid price arbitrage with collective crowd wisdom on the economic fundamentals that are outside of their control – that the producers and the consumers are trying to agree to – for the future. Those economic fundamentals would be there, regardless of whether or not the traders were there or not.
July 7th, 2010 at 6:48 am
Once I believed …
Once I believed that Santa Clause brought me gifts.
Santa Clause didnt.
But I did receive presents!
They were from Mom & Dad.
Oils was like $150!
Now its way not.
So if it is not the traders the what?
It cant be true use demand because use hasnt dropped by 2/3!
Somebody somewhere is speculating on something.
This isnt good guys and bad guys.
I just want to know what is determining the price.
It certainly isnt me going from driving 150 miles per week to 50 per week.
July 7th, 2010 at 6:48 am
I personally think …
I personally think that this is a much more complicated issue than, “traders provide liquidity”. However, oil is running out and prices hit that high when the world economy was still overheated from Greenspans unltra low rates. I would say that is a much larger factor than the speculators; though we cannot dismiss speculation because it was out of hand with major players taking up a major portion of the market. Some of those guys do take delivery!!! I’m no expert but this is not black and white.
July 7th, 2010 at 6:48 am
i like your …
i like your commentary, looking forward to the next vid, 5 stars
July 7th, 2010 at 6:48 am
And as I’ll discuss …
And as I’ll discuss in the future entries in this series …
What about when they pressure the price down? And as I present in this video – their bids are not in the spot market, and cannot take place in the spot market.
They’re not affecting the price, up or down, on the price of oil today. The price of oil today has no traders, and never has. That’s the spot market. Traders are only helping hedging interest in future contracts for corporations, not the spot market.
July 7th, 2010 at 6:48 am
In the 70’s and 80′ …
In the 70’s and 80’s, the big time markets was the commodity markets, and the volume was MARKEDLY higher than it is today.
July 7th, 2010 at 6:48 am
Compare that to …
Compare that to other, more liquid and stable markets, like Eurodollars, which has volume in the hundreds of thousands, and is much less erratic.
July 7th, 2010 at 6:48 am
In the commodity …
In the commodity markets. They are suffering from a marked lack of volume, which is liquidity.
Which has had a predictable result. The markets begin to swing more erratically. You know what the volume was in Oats today?
349
July 7th, 2010 at 6:48 am
First – you present …
First – you present your statement in the form of a unsubstantiated claim, which is a logical fallacy, petitio principii. You cannot begin your statement with the end conclusion.
Secondly, you assume there wasn’t increased volume in these markets in the 40’s, 50’s, 60’s and 70’s. If it’s one thing the commodity markets are suffering from – than when I started, is DECREASED volume, not increase. The pork belies market is almost dead, as is oats.. Volume is down across the board
July 7th, 2010 at 6:48 am
I hear this …
I hear this liquidity arguement all the time from traders. so how did the markets operate in the 40s 50s 60s 70s? small retail traders didnt have access to the markets like they do now and the markets were fine. i really think traders cause huge swings in the market…
July 7th, 2010 at 6:48 am
It allows producers …
It allows producers or consumers of the actual commodity, who need it for business to more accurately hedge themselves. In other words, a producer may have his commodity, in his warehouse, it’s risk of loss is very low, so he doesn’t need to worry about if he can gather his commodity into the ‘warehouses’ in March.
But he still has to see if he can get in, say, a crop, in for the next season. So he may need to be involved, or hedged, further out in time.
July 7th, 2010 at 6:48 am
Thanks Dan,
great …
Thanks Dan,
great series about futures traders!
I have a question.
Whay are the march, april, may and june contracts being traded at the same time in the crude light oil?