Commodity Investors Drive Oil

Here is another good read for all that missed it. As we know, all things affect the currency market. Forex is a profession of knowledge, more knowledge=better trader.

Commodity Fund Investors Help Drive Oil Prices Higher

By Adam Shell, USA TODAY

NEW YORK — The list of culprits to blame for $4 gas and $125 oil keeps getting longer.

Oil-thirsty China and India get most of the blame. The declining U.S. dollar, tight supplies, geopolitics and hurricanes also are on the villains list.

Last week, the Commodity Futures Trading Commission (CFTC) alleged that market "manipulators" may be partly responsible for the spike in crude oil and that an investigation is underway.

The latest scapegoat: institutional investors that are pouring billions into index funds pegged to a broad basket of commodities, including crude oil, exacerbating the price gains.

Tuesday, financier George Soros told Congress that commodity index funds contributed to the oil "bubble" and caused "harmful economic consequences." His remarks echoed those of Michael Masters, a hedge fund manager, who testified on May 20 before a Senate panel. Masters said oil's rise directly correlates to the cash that pension funds and endowments are pouring into commodities futures markets. Assets allocated to all commodity index trading strategies by "index speculators," he said, have risen from $13 billion in 2003 to $260 billion through March.

"These trading strategies amount to 'virtual hoarding' via the commodities futures markets," Masters testified.

Soros urged regulators to improve market oversight and place limits on the size of commodity-specific positions. The CFTC last Thursday said it will require monthly reports from traders on their index trading to better "identify the impact of this type of trading."

Blaming the indexers for the rise in oil or branding them as speculators is unfair, says Michael McGlone, director of commodity indexing at Standard & Poor's. S&P GSCI is a popular commodity index. Investing in an index fund that provides broad exposure to commodities is no different than an investor buying an S&P 500-stock index fund to diversify a stock portfolio, he says.

Don Luskin, chief investment officer at Trend Macro, says index investors are just easy scapegoats. "The evidence against commodity index funds is circumstantial at best," he says.

After falling $3.45 to $124.31 a barrel on Tuesday, oil is still up 30% for 2008. The drop came after Federal Reserve Chairman Ben Bernanke said more interest rate cuts are unlikely. That helped boost the dollar, which depressed oil, because oil is denominated in dollars.

Five years ago, big investors were tiny players in commodities. But after the 2000 stock bust, they sought out the asset class to diversify. Greenwich Associates says that a third of investors in commodities have been active in these markets for less than three years