As long as any normal person or institution can buy commodities when clearly it is not their line of business thats what happens
Why are investement funds betting on commodity prices getting higher or lower when these commodities are not supposed to be used by them...
American capitalism is very advanced and sophisticated.
We have to go back to the very basics, which is what is the purpose of a market?
The best answer, or one of the best answers, is "price discovery."
A free market will find the correct price, where allocation of resources are the most efficient.
--------- --------- ---------
The function of a futures market is best understood if we are a simple farmer.
We grow the wheat and soybeans expecting a price to be sold at, at a later date, due planting season, growing season, harvest season.
But we got no idea what the future price of the crop would be, so we go to the futures market and lock in a price that we will sell our crop. When the harvest is done in a few months, we make delivery on that commodities futures contract.
If we do not hedge our crop in the futures market, then if the price of the wheat or beans go up, we make a windfall, if it goes down, then President Trump will bail out his friends and the farmer might get some crumbs as he declares bankruptcy again.
------- ------- -------
Okay, only at this point, we can make an effort to comment on your comments.
In the futures market, such as oil for instance, thousands upon thousands of contracts are traded. However, even 1 contract changing hands is very important. Even at 1 contract, it is price discovery, and that 1 contract trading, representing price discovery, allows for entities who trade 1000s of contracts to see where the market is at.
In other words, an active liquid market is best for price discovery.
Going back to the farmer, he is a participant in the market trying to sell his crop in the futures market. There is the bread factory, who needs the wheat, so the factory buys the contract on the futures market. Then an important point is that the market will attract speculators, who will add liquidity and their input, trying to find the correct price.
That is why having all these participants, the seller aka farmer, the buyer aka factory, and the speculator who provides liquidity and their input of where they think the market is going, is critical for the functioning of the commodities futures markets of today. You need all three. Everyone's input is important. Who knows. Maybe someone knows something you don't know.
-------- -------- ---------
Actually the story ends here with the commodities. But the story of our times, is what came next, which was the stock futures index contracts, and bond futures contracts. What happened there, it seemed like that opened the door for all the weird different derivatives that the Wall Street firms trade among themselves, such as Lehman Brothers. Everything on Wall Street became a derivative.
Now, we get to the best part for those right wingers on Wall Street. No one understands what they are doing so, they get away with it. Is this fair. No. It is not. But realistically no one has a clue how to change anything or where to begin.
However, we cannot be concerned with that. We got to protect ourselves. Stay long until the music stops!
[rant] [/rant]
