The speculator's position in commodities markets has always been a contention among market regulators, policymakers, and even other market players. This discussion has been going on for a very long time. A bad connotation is attached to the term "speculator." However, this is often the result of a lack of comprehension.
What Are Speculators?
People who speculate often prepare themselves well. They conduct continuous monitoring and analysis of the fundamental and technical aspects impacting the markets in which they engage in trading. The practice of speculating may take many different forms. A party that constantly displays both a bid price and an offer price is known as a market maker. A two-way price maker is a speculator who makes the following assumption: that there will be a chance to benefit from or complete the gap between the purchase and selling prices by creating a two-way price. A speculator is someone who invests money in the manufacturing of commodities.
Take, for example, the situation of a gold miner. Let's imagine they invest millions of dollars in a mine in the expectation of extracting gold at a lower cost than the price it is now fetching on the market. They are a speculator since they are gambling on the outcome of the investment and hoping for a favorable return. Lastly, a proprietary trader can try to purchase at low prices and sell at high prices in various assets, such as commodities. This strategy might be successful.
Impact of Speculators
A tale is told here about Paul Jacobson, who served as Delta Airlines' senior vice president of finance for many years. A long time ago, he expressed his view on those who speculate. During an interview, he said that speculators were to blame for high oil prices since they drove up the price of oil to generate paper gains at the cost of oil purchasers. According to his interpretation of the situation, he demanded that decision-makers and regulators take action to address the issue.
Here is something that was not brought up in Jacobson's article: A speculator is someone who speculates on the market by taking either long or short bets. No matter what happens, the speculator must finally close out their position by selling their longs and purchasing back their shorts. This market player category influences neutral markets over the long term, with no net gain or loss.
In the world of commodities, the speculator does bring an essential contribution to the table. We must remember that producers must sell their wares, and customers must purchase them. However, in many cases, such producers may not necessarily intend to sell at times or prices that correspond with when customers want to make purchases. This is because those manufacturers want to maximize their profits. This disparity is often closed by the participation of speculators in the market. The role of the speculator is to increase market liquidity.
The continuous discussion over the benefits and drawbacks of speculation is essential for several reasons. One is that proponents of limiting speculative behavior in commodities markets tend to be more outspoken during bull markets, characterized by rising prices. Some people hold the opinion that speculators are to blame for the increased cost of raw materials to the final customer, who is the consumer since they drive up prices even more. Despite this, the speculative presence in markets remains unabated even when prices move in the other direction. It is possible that when prices fall, speculative activity could momentarily drive prices still down, ultimately to the advantage of consumers but at the cost of producers.
The Bottom Line
There would be no need for speculators in an ideal society in which producers of commodities and consumers of commodities could always do business directly with one another. However, this does not mean that the world is a perfect place. Speculators cause the addition of liquidity to markets. Therefore, as long as these participants operate within the boundaries of the norms imposed by regulatory agencies, commodities markets benefit greatly from their participation. The lubrication that speculators give for the functioning of markets comes in the form of liquidity. Because of this, they can function effectively for all involved parties.
Undoubtedly, the discussion on the function of market speculators will continue. It is essential to have a solid understanding that the proper operation of today's markets depends on this particular set of market players. After all, a lack of liquidity will increase costs for everyone in the long run, including both the producers and the consumers.