The Financialization of Commodities

Abstract

This report provides an analysis of the financilization process on the commodity market. Methods of analysis include linear regression between prices and amount invested for each commodity using the CFTC Swap Dealer Report, own simulations on portfolios composed of commodities, values at risk, moving averages calculations and charts to support our purpose. Results of data analysed show that investors do not invest regarding the prices and do not withdraw their amount depending on the volatility, as correlation could not been established. In particular, swap dealers and non-commercial traders have a passive approach, contrary to an active one which can have a an incidence on the market.The report finds the financialization evoked in the literature is not relevant to explain volatility. Swaps, options and futures help producers and buyers of commodity by providing liquidity and risk management. Reasons found for the volatility are:- Intrinsic unpredictible characteristics of commodities such as crops, climatic hazard and inelastic demand.- An historic volatility due to a fierce speculation before the market of commodities has been standardized with futures and regulatory institutions which makes us rebalance the term of financialization.- Irrelevant indicators which go against the principle of financilization: long oil futures positions and a diminution of prices is possible, commodities futures prices as a barometer of global economic strength, both lack of inventory and increasing prices in a slumping economy.The report also investigates the fact that the law of supply and demand for commodities is disrupted because of a new use of commodities: Companies tend to abandon inventory costs, which renders obsolete the mean reverting theory, commodities are not use for their initial purpose to produce goods or feed people but more and more for other purpose such as hydrocarburants or pur speculative investment which is called the flight-to-investment. The example of gold is striking. Long term perspectives such as the increasing worldwilde population and an emerging middle class which put pressure on the price are approached.The paper is backed up with professionals of commodities after the classic progress of the thesis. Interviews of professionals make more concrete our reflexion and illustrate what are the concrete repercussions on the market