November 13, 2009 / 12:47 PM / 8 years ago

Who is and isn't a speculator in commodity markets?

LONDON (Reuters) - The distinction between speculative and commercial positions in commodity futures is often blurred and can be misleading.

That was the answer from fund managers to a question on whether the London Metal Exchange should, as the U.S. Commodity Futures Trading Commission does, issue a weekly Commitments of Traders (COT) report on futures holdings.

“There are non-commercial users who use industrial metals commercially and there are commercial users who speculate in industrial metals,” said Douglas Hepworth, director of research at U.S.-based Gresham Investment Management.

“The only logic for the LME adopting a similar approach would be to parallel the bad abstractions of U.S. regulation. It would reinforce an archaic and potentially harmful distinction.”

The London Metal Exchange said in July it had looked at breaking down the information, but that it had no plans to do so and that a difficulty was in how to classify positions.

The LME told Reuters its position hasn’t changed since then. At the time it said: ”The U.S system categorises users of the markets and attributes all their positions to the same category.

“We do not think that users of the LME markets break down into simple categories or that all of their positions fall into the same category.”

That is the crux of the argument against the split.


The division goes back to a simpler time -- early last century in the United States -- when local producers would try to lock in future prices with contracts that were bought by private investors such as doctors hoping to make extra cash.

“This whole issue of what is speculative is misleading,” Sean Corrigan, chief investment strategist at Diapason Commodities Management in Switzerland.

“Commercial in the old days used to mean you were a farmer or an oil producer ... Since then more and more commercial enterprises have run their treasuries as profit centres, which have become speculative arms.”

That is said to be the case with some natural resource firms, which pass as commercials because they have physical positions, but in reality trade the commodities they produce to boost the bottom line.

Positions held by hedge funds and banks’ proprietary traders are not always clear either. They sometimes call themselves commercial if they are holding physical positions.

Fund managers also question whether the word “speculator” with its negative connotations should be applied to pension funds, which invest for the long term to provide retirement income for millions of people.

“Some tirelessly analyse the COT,” said John Brynjolfsson, chief investment officer at U.S.-based Armored Wolf.

“But I‘m more concerned that the further away U.S. exchanges get from their core mission of facilitating the free exchange of risk between buyers and sellers, the more liquidity and jobs get pushed off shore.”


Fund managers say the reports, scrutinised in detail by the market, have little value as ultimately the total number of long positions equals total shorts -- for every long position there is a short position.

Another problem is the idea that non-commercials or speculators have access to information that producers don‘t.

“It is presumptuous to think that global players represent the smart money and locals the dumb money,” Brynjolfsson said, citing Mexico’s peso devaluation in late 1994.

“The locals were much more clued in and moved a lot quicker than the global players did, prior to the devaluation.”

The CFTC did try to stop producing the COT report, but many using it for research and seeking the holy grail of accurate price prediction complained. The regulator relented.

“The largest complainers about that action were some technical analysts who had built businesses using the reports to justify their dubious predictions,” Hepworth said.

Editing by Sue Thomas

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