On 2/9/2011 2:06 PM, Doug Henwood wrote:
>> Okay, so this is telling us that *commodity funds* received $60bn in net inflows. They used that money to buy commodities contracts, I'm assuming. That made them buyers. But who sold them the commodities contracts? Sellers, of course. So the net flow into commodities contracts was zero.
> So you're telling me that an inflow of $60b into commodity funds from buyers who weren't there before won't tend to drive prices higher? Really? Especially when the buyers are intending to stick around - a lot of this money was index funds, which have to stay invested as long as their clients don't start cashing in? And were not present in the market before?
I think you're confusing cause and effect here. When $60bn of new money flows into commodities via commodity funds, $60bn of old money flows out of commodities via non-fund types of investors. Now, I would assume that this shift in the *distribution* of holdings - towards commodity funds, away from whoever else, i.e., moving more toward more "aggregate" forms of ownership - is the sort of thing that happens when psychological conditions in a market are getting more bubbly. In other words, people who've never in the past had the time or patience to buy and sell commodities piecemeal are now getting interested in this market and pushing out the piecemeal investors. Probably the same thing happened with the stock market during its bubble - the distribution of holdings probably shifted sharply away from individual ownership (more rapidly than it had been doing before). But this is just a "symptom" of a psychology that's getting frothy. It's this psychology that drives up prices.
> Sure they have to buy it from another holder. But at a higher price than that holder probably bought it. Yes, the psychology of expected valuation contributes to the price rise, but there's nothing like a flow of scores of billions to stimulate psychology. The flow of money into the market drives the valuation of the stock of assets higher. When the money flow slows, the bubble will pop, and money will exit for some other asset.
This *really* gets it backward. Your saying money flows in and out and that causes psychology to change. So the money flows in and out all on its own initiative? Little dollar bills punched the computer keys themselves? Of course not - people did it. Their decisions to flow money in or out were based on their expectations about the future. They weren't coerced into doing it by their bank balances.
SA