To the extent that you actually put up the money, sure. But if you are buying on a margin that only requires that you put up a small percentage of the money, it is smoke and mirrors.
No it's not, it's a legitimate part of the most sophisticated financial system in the world. It provides the necessary liquidity to facilitate derivative contracts for energy-focused operators as well as financial investors. Buying on margin is simply a form of leverage. I'd be stunned if you didn't already have some form of leverage in your life, be it a mortgage, auto loan, student loan, etc. I suppose all of the assets underlying those debts are 'smoke and mirrors'? Hilarious! The level of ignorance in this thread is astounding.
That's an interesting way of phrasing it... 'making a bet'. How many futures contracts have you purchased in your life, pgabs? My strong suspicion is a big fat zero. You simply don't know what you are talking about.
the hilarious part is you think your base understanding of financial concepts makes you superior. like you're warren buffet. "wow, i'm trader and i know what a futures contract is, do you, I'm so much better than you" truly sad
For the speculator, it is gambling. But, he serves a function in the economy because he takes on market risk so that others don't have to. Someone who has exposure to oil prices (say, an oil producer) is at the mercy of the market. Say it cost him $50 to get a barrel of oil out of the ground and to the market. He wants to make sure he can at least make $50 dollars on it, and if the market fell to $30, he'd lose his shirt. He doesn't want to take the risk of the price falling, so he locks in the price now, essentially selling that risk to the speculator. That way this oil producer's fortunes can be dictated by the value he adds to the product (getting it out of the ground and to a refiner in an efficient, cost-effective manner) instead of by the whims of the commodity market. As much as I hate to agree with TJ when he's acting like an ass, our economic system needs the leverage that is provided in commodity markets, just like mortgages or student loans. I don't think there is significant risk of uncollected debt with this system, and I certainly don't think oil prices are high because of it.
dude i'm not going to dignify your assholishness by proving to you what I know, you prove to us what you know. all you did was challenge the comparison to a bet, which it is. that wasn't a value statement about the system, it was just the fact that you compared buying a home, the biggest asset a person can own, an asset that can make or break a family, the biggest driver of our economy, home ownership to people trying to predict what stocks are going to do and making money off that or hedging. It was a ridiculous comparison
Suppose the price of oil goes down what happens to all these pension funds that have oil future contracts. Who is going to bail them out?
But you have to have reasonable margin requirements. The stock markets around the world are regulated why not the commodity market?
i work with natty gas and power (electricity) traders. we margin (or get margined by) county parties everyday because the price is so volatile right now. now i'm not going to pretend to know what goes on at an institutional level in financial markets, but i'm sure the same happens. the credit standards are put in place in when a counterparty has a contract in the money, I'm sure they are going to call on it. the problem isn't credit, its the assets.
