Special Financial Times Article

Last week, the Financial Times ran a special insert entitled “FT World Commodities.” This informative report highlighted many developing trends that have boosted the profile of the futures industry. Listed below are some of the key points:

• China. As the world’s most populous country continues to grow economically, it has boosted demand for many base commodities, which are used to construct its modern infrastructure. Surging Chinese demand has drastically affected everything from crude oil, steal, and copper, to numerous other financial securities markets, including foreign exchange. Naturally, this is a well-known trend, but consider the statistics. China accounts for 25% of the world demand in agricultural products, second only to the U.S. at 28%. China accounts for 8% of world oil demand, up from 2.5% in 1990. And the country accounts for a full 20% of the demand for base metals.
  
  
• India. The story is much the same in India, although to a lesser extent. A key difference concerns Gold. Even with relatively tame inflation across the globe, Gold is now approaching $500/per troy once. Much of this increase can be seen as evidence of the boom in futures speculation. On the other hand, it also reflects strong demand in the underlying market. As India becomes more prosperous, there is no evidence that their purchases of Gold will diminish. In fact, their purchases are likely to increase. Keep in mind, also, that both India and China are major producers of many base commodities.
  
  
• New Entrants. Whereas futures trading has traditionally been seen as a niche market, dominated by “insiders” and large producers, many others have entered this market. Although major banks -- namely, Goldman Sacks and Morgan Stanley – have continually been active in futures markets, now many others are getting in. And these major banks are seeing the profits from commodities trading add significantly to their overall group results. The involvement of large banks in the market has resulted in higher liquidity. And let’s not forget the hedge funds, whose large trading has had a similar effect.
  
  
• Difficult Equity Markets. Lastly, with global equity markets trading sideways ever since the tech bubble of 1999, many savvy investors have been looking into “alternative investments”. This increased interest has sent a flood of new investors into the markets, which in turn, has spurred an increase in new products.
  
  
• Electronic Markets. Although progress has been achieved more slowly in certain markets than others, the shift towards electronically traded markets is real, and has generally lowered the cost of trading and improved market efficiency. As more global networks are established, the opportunities and ease of use continue to improve. The easier it is to trade, the more apt investors will be to participate in these markets.
  
  All of the above are major trends that look likely to continue. As such, markets are likely to become more efficient, transparent, and hopefully, more profitable for global investors.