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 are also on the villains list.
Last week, the Commodity Futures Trading Commission (CFTC) alleged that market “manipulators” may be partly responsible for the super-spike in crude oil and that a probe 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.
Last week, 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 recently 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.
