Increasingly, it would seem the government is intent on curbing speculation and contract ownership of core commodities. Starting last summer, the Commodities Futures Trading Commission, or CFTC, began to debate new position limits on traders and speculators in the energy complex. Regulators blame the big spike in commodities in 2008 on hedge funds and other speculators and have decided to impose limits on contracts.
Anticipating this change, several energy-focused funds and ETFs adjusted their position sizes in oil and natural gas to reflect an anticipated change in trading limit guidelines. But by encouraging less speculation, the CFTC is driving business away from the CME in Chicago, NYMEX in New York (owned by the CME) and other exchanges in the United States to Europe and Asia where limits have not been imposed.
Data from British regulators confirm that price spikes in oil and gas were barely attributed to speculators and therefore have refused to follow the CFTC. London, also a major commodity trading center, will benefit the most as a result of new CFTC guidelines. Amazingly, a similar study conducted by U.S. officials delivered the same verdict; yet legislation followed anyway.
Recently the CFTC announced fresh limits to curb speculation in energy markets.
Importantly, despite a public inquiry on the subject last fall, the CFTC and the government still believe that speculators caused most of the crude oil super-spike in 2008 before prices crashed in July of that year. For now, the new position limits only affect energy commodities like crude oil, natural gas, heating oil and gasoline.
But traders are worried that the CFTC might also include limits on contracts based on copper, gold and silver. All three metals remain in a secular bull market since 2002.
The new laws come with controversy: new data collected by the CFTC from banks and brokers in the United States indicated that index funds – largely blamed for the super-spike in energy prices – were actually reducing their positions as prices were rising in 2008.
Meanwhile, some funds like UNG, or the United States Natural Gas Fund, have started to trade non-U.S. gas contracts as an alternative to CFTC position limit curbs. Other index funds have followed.
In the end, if other international commodity exchanges don't enact similar laws then the United States will lose more contract volume to the competition.