It was a subject of debate and considered as a myth that the idea of “excessive speculation” is new. But in fact, the idea of speculation is indeed predecessor of commodity exchanges itself. For more than 160 years, commodity markets have been providing a platform for hedgers and speculators to fulfill their specific requirements, i.e., to adverse risk and to earn profit respectively. With the passage of time, complex and sophisticated trading platforms have been developed, ultimately attracting more and more traders in the market. With excessive speculation eroding the market, specifically the interests of hedgers, and the concepts of position limits were later developed. Despite initiating practice of position limits, legitimate commercial hedgers (farmers, oil producers etc.) were given exemptions from these limits. In an attempt to standardize the commodity market, later, reforms have been developed advocating stable, open and competitive markets, serving needs market traders.

Moving ahead with the market, in recent years, most of the academic studies have proven that the market fundamentals alone are responsible to drive prices. But in fact, the concept of market fundamentals solely controlling prices is not realistic. Considering around 10 recent studies, market experts, academicians and economists have revealed that fundamental factors alone could never explain price swing in commodities. The concept of excessive speculation, in this case also seems to have played a key role in resulting trending commodity prices at international markets.

It is indeed believed that excessive speculation, with a manipulative perspective, eventually deteriorates the market sentiments. In fact, the concepts of position limits, non-manipulative trading and other related trading methodologies are mandatory to prevent the interest of hedgers and other market participants. As reported by CFTC, that fundamental factors, not speculation, drives prices, market players in emerging market like Nepal must understand that price fluctuations are actually a resultant of fundamental factors affecting prices of commodities.

In reality, the size of market, market players, trading lots and many other related factors are associated with fundamental factors and directly impact on prices of commodities. We must understand that, in small sized market, the concept of excessive speculation is very difficult to practice, as the market may not support the practice.

To be continued tomorrow…..