Speculation

Speculation, defined by the Merriam-Webster online dictionary, as it relates to markets, “is to assume a business risk in hope of gain; […] to buy or sell in expectation of profiting from market fluctuations.”. It can be divided into two distinct categories. Long-term speculation is when an investor buys an item (commodity, security instrument, etc.) and holds it, in the hopes of its value increasing over time. Short-term speculation is done by those who anticipate a given item’s price to fall. In most cases long and short speculation is done by the same actors. Speculators are often vilified in public discourse and blamed for increasing prices. However, it is the speculator who assumes great risk, and this exchange helps to maintain inventory; as a result, speculators are benefactors of society.

In short, they buy low when a surplus exists, hold, and then sell when the price increases due to higher consumer demand. The newly introduced product from the speculator will tend to reduce prices again. Meanwhile, producers continue operations, thereby ensuring that enough is available to meet future demand. Without a speculator providing incentives to producers, shortages and rapid price fluctuations can occur. All actors would find it difficult to plan in such an environment, and resources would be frequently misallocated.

For those who subscribe to the notion that speculators are the cause of rising prices, as opposed to inflation, controlling speculation is seen as the answer. In the summer of 2011, a contingent of US Senators, lead by Bernard Sanders, introduced legislation meant to curtail oil speculating, thought to be responsible for dramatic increases in gasoline prices. Sen. Sanders wrote that his bill would “establish speculative oil position limits […] and double the margin requirements on speculative oil trading….” As of September of 2011, the legislation has not been passed into law.