Speculators play a vital role in the commodity market to take the offsetting positions in providing enough liquidity to make trades. In short, speculators are the market participants who utilize short-term strategies in order to outperform traditional long-term investors. And it is not just limited to the commodities market but to other financial markets such as stock market and currency market. It is the speculator who is willing to take risk of hedgers (long-term investors) to make a profit.
So, you can imagine how the futures market will perform without speculators. Especially, the commodity market which is much more complicated than you can imagine. The role of speculators in commodity market always arise suspicion among market regulators and even other market regulators. It is because, at the time of excessive swings, individual investors, politicians, and market regulators start questioning the role of speculators in the commodity market. Commodity speculators take the advantage of market volatility and trying to make profits from the rising or falling prices through the commodities futures markets.
Role of Speculators in Commodity Market
Normally, rising prices means greater profits for the underlying owners of the commodities. On the other side, most investors in the commodity market are long and make money when the market increases. But, for many companies and underlying customers, rising prices means “Costs have grown more expensive.”
Besides, the high-volatility in the commodity prices makes it more difficult for companies and individual investors to do future planning. That’s where the speculators play a major role in the commodity market and utilize the short-term strategy and repeating patterns based on technical and fundamental analysis and use that information to profit from the future ups and downs in prices. In doing so, each speculator develops their own way of trading in commodity and other financial markets.
Technically, the commodities producers must sell and consumers must buy. But, what we see is, “The commodities prices coincide with when the consumers plan to buy.” It is because often producers don’t wish to sell at times or prices. That’s where the speculators play the role of bridging the gap between consumers and producers in order to bring liquidity to markets.
This speculation in commodity market sometimes put a big impact on the market. For instance, if a speculator believes that a particular commodity is going to increase in value with time, he/she may choose to buy the commodity as much as possible. This would lead to a sudden increase in the price of that particular asset. If this action is taken as a positive sign, then it may influence other traders to purchase the asset as well, further increase in value. This speculation may drive the price of an asset above its true value. The opposite can happens if the speculator believes that there is going to be a downtrend in a particular commodity. Fluctuations in underlying supply and demand caused by the speculation in commodities have arguably the most impact on commodity prices. Thus, commodity speculators are closely watched by the market regulator of the commodity market for illegal and unethical activities. But, it is clear that speculators play a major role in the commodity market, adding liquidity to markets which help market to operate efficiently.
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