Government should not tamper with how speculation works in commodities markets, says the CEO of the London Metal Exchange.
Doing so would be "foolish," and would not help to lower prices, London Metal Exchange Chief Executive Officer Martin Abbott said.
Prices are set by supply and demand, Abbott told Bloomberg News. In the United States, the chief regulator for commodity futures — pressured by politicians — is investigating the role that commodity indices have played in the huge surge in energy prices.
Walter Lukken, acting chairman of the Commodity Futures Trading Commission, said his agency will look into whether commodity trading needs more regulation. His report to legislators will be ready by September.
The new, tighter rules may require higher margin requirements. Politicians are blaming trading for $4 a gallon gas.
"Make no mistake about it, the excessive speculation in commodity markets is having a devastating effect at the gas pump that is rippling throughout our entire economy," said Bart Stupak, the Michigan Democrat who chairs the committee's oversight and investigations panel.
Airline and steel company CEOs are up in arms, too, as higher prices have forced some of them to post enormous losses.
Abbott heads the world's largest marketplace for aluminum, copper, and other base metals. He says the answer is more commodities supply from the emerging markets.
But forcing regulation now just won't change prices, Abbott said.
"There is in the commodity space as a whole something going on which cannot be ascribed to simply hot money coming through exchanges,'' said Abbott. "It would be very foolish of any government to stifle participation in markets.''
The increasingly high prices for corn, copper, and crude oil have caught the attention of U.S. Senator Joseph Lieberman and billionaire investor George Soros.
Lieberman has said more regulation is needed so that speculation can be curbed. Soros has said the high prices are speculative and indicative of a bubble in the market.
Abbott rejects that idea.
"Why would an elected politician have a better idea of what the price is than the summation of the entire world's oil industry trading across an open exchange?'' Abbott said.
"For a government to try and determine a good price for something is nonsense. What's going on here is a structural change."
Speculators are what drive the markets and enable them to function, Abbott said.
"Without speculators markets don't work,'' Abbott said. "`The world economy is not going to function without the free flow of cash, and the free flow of cash is not possible without the free interaction of markets.''
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