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April 11, 2012

Citigroup Executive Concludes Speculators and Commodity Index Funds Distort Markets, Drive Up Prices

A Citigroup vice chairman has concluded that financial flows – including commodity index funds – distort commodity markets and drive up prices for American consumers and businesses.

Peter Orszag, vice chairman of global banking at Citigroup, has written a Bloomberg View column in which he notes that “financial flows (including index funds) can, over brief periods, exert a noticeable destabilizing effect.”

Orszag is the latest in a growing list of experts analyzing the data and concluding that speculators are driving up commodities prices, as hundreds of billions of dollars have poured into these markets and squeezed out purchasers and producers. While Orszag’s focus was on the aluminum market, he expressly concludes that “[t]he aluminum market thus suggests a broader conclusion, which other evidence indicates also holds for the price of food and other commodities:  The Friedman principle of stabilizing speculation is not always right.”  Of course, others have come to the same conclusion regarding the oil and gas markets, including a Goldman Sachs researcher and economists with the St. Louis Federal Reserve Bank.

“Independent analysis and in-depth studies show that speculators in general and commodity index funds in particular are distorting the commodity markets and driving up prices.  The debate now is not if commodity index funds play a role, but it’s how much they add to the price of raw materials for American business and gallons of gas for American families,” said Dennis Kelleher, president and CEO of Better Markets, a nonprofit, nonpartisan organization that promotes the public interest in financial reform. “The Wall Street speculation premium that everyone is now paying, maybe as much as 25%, must be stopped.”

Going back 27 years, Better Markets has conducted research showing commodity index funds have radically changed the price structure of commodity markets. Prices that were based on supply and demand are now driven up by investors placing self-fulfilling bets on higher prices for oil, wheat and other products – contributing to boom-and-bust cycles.

Orszag in his column notes that “trying to use inventory levels to measure how far the market is out of whack may not work that well. As a result, ‘multiple equilibriums’ of plausible market prices can persist over a surprisingly long period before supply-and-demand fundamentals finally exert themselves.”  That is what the multi-decade data and research shows for a broad range of commodities.  That is why Better Markets has called for a ban of commodity index fund speculation, to bring prices in line with supply and demand.


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