The argument can be made that a large portion of the current bull run in nearly all commodities can be explained by a combination of institutional asset allocation in commodities as an alternative asset class (some of it via swaps which allow for unlimited position size regardless of physical availability of commodities due to a loophole in commodity trading regulations) and trend followers, with the sick result of rising prices increasing price further in a positive feedback loop.

I'm generally libertarian and anti-regulation, but the use of swaps to get around position limits on a market that arguably isn't equipped to handle assets of this magnitude doesn't sit well with me. I'm all for speculators in commodities markets creating liquidity and assuming risk, but that's not what this institutional asset class is doing in these markets.

Here is a link to some recent testimony (PDF) before the Senate on the subject:

"In the popular press the explanation given most often for rising oil prices is the increased demand for oil from China. According to the DOE, annual Chinese demand for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion barrels, an increase of 920 million barrels.8 Over the same five-year period, Index Speculators' demand for petroleum futures has increased by 848 million barrels.9 The increase in demand from Index Speculators is almost equal to the increase in demand from China!"

and some other articles on the subject,

Guardian (UK)
LA Times
Business Week

Stefan Jovanovich notes:

There have been only three periods of six months or longer since 1972 when Americans drove fewer vehicle miles than they did a year earlier: (1) the 3rd and 4th quarters of 1974, (2) the 4th quarter of 1979 and all four quarters of 1980, and (3) the 4th quarter of 2007 and the 1st quarter of this year. Six months into both of the prior periods was a close to ideal time to buy US equities, but that may be the result of coincidence rather than correlation. Most things are.


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