Speculators are getting a bad rap, particularly when the oil prices are spiking or the value of a currency is not good. This is because the media frequently confuses the line between manipulation and speculation. Manipulation contributes to overall economic harm, while speculation performs many important functions that maintain a healthy economy.
What Speculator Is
One can think of a middleman as the process by which goods are distributed. It would be a very different world if we only had access to the products. Hence, we need or want to produce in the vicinity.
More often than not, there is at least one component in every product in your home that requires an international trip to get there.
The middleman’s markup usually matches the materials and overhead costs. The function is to ship, sort, bag, and display those products in a nearby store. In addition, some profit to keep the middleman fulfilling this function.
In contrast, the speculator makes his/her money through contracts that allow him/her to control commodities without ever handling them directly. Speculators generally don’t arrange shipment and storage for the commodities they control.
This hands-off approach has given speculators the mistaken image of aloof financiers jumping into markets that they don’t care about to make profits from producers. It is the types of salt-of-the-earth that legislators always claim to uphold.
Avoiding Shortages
When criticizing speculators, the most obvious function people overlook is their ability to head off shortages. Shortages are harmful since they result in price spikes or resource rationing.
However, such shortages are not as easy to find on larger economies of scale. That’s why commodity speculators help keep an eye on overall demand, identify shortages, and transfer the product to places of need.
Therefore, higher profits through intermediaries that use futures contracts to monitor their costs.
