Price Formation on Commodity Implications for Resource ... · Implications for resource security...
Transcript of Price Formation on Commodity Implications for Resource ... · Implications for resource security...
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Price Formation on CommodityMarkets and Implications for
Resource SecurityDavid Bicchetti
Gerzensee, CEP WorkshopApril 2014
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DISCLAIMER
• The opinions expressed in this presentation are those of the author and are not to be taken as the official views of the UNCTAD Secretariat or its Member States. The designations and terminology employed are also those of the author.
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Price discovery• The price discovery mechanism must reflect the true balance between real supply and demand in the market
• If not, the price sends out a wrong signal and the adjustment in supply and demandis wrong
• Speculative demand or supply may give the wrong signal on the true situation and lead to suboptimal outcomes (i.e. bubbles, over/undercapacity)
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What has changed in the last 10 years?
• Growth in emerging economies• New sources of energy, increased yield, etc.• To some extent, the above can be predictable but…
• AuM in commodity derivative markets increased dramatically from $10bn to over $400bn
• Financial investors represent the bulk of market participants
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Since the beginning of the “recovery” financial sophistication in
commodities increased• Asset under management, by product, 2005‐2011, US$ billion (ETP=Exchange
Traded Product)
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But not only “retail products”
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Even with live cattle !
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Endogeneity is at record high
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Implications for resource security• Researchers have developed indicators that can inform if a market exhibits inefficiencies or distortions (correlations, endogeneity, LPPL, etc.)
• Avoid costly situations (financial crisis, interest rate hikes, etc.) that affect the real economy
• Long term interests over short term speculation (resource planning & development)
• Avoid macro distortions (diversified economy and trade pattern, energy dependence, etc.)
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