Necessary gambling is what helps the market figure out the real long term availability of something. I have not seen any necessary gambling in my years in manufacturing. So in my view all speculation on commodities seem unnecessary.
> I have not seen any necessary gambling in my years in manufacturing.
You need to manufacture a widget and it must cost no more than $5. You have a few inputs to your widget, some made with steel and some with plastic. If steel and plastic prices increase, your inputs cost more than $5 and you’re making a loss on every widget you sell.
So you go to the futures market and take a bet that the input prices will increase. If you’re right, you win $, which makes your widget manufacturing profitable and you’re still in business. If prices fall you lose the bet, your profits are lower. But hey, at least you’re still in business.
A responsible, well run manufacturing business benefits from the existence of such a market because it allows them to de-risk.
What’s the person on the other side of the trade up to?
This debate reminds me of the lead up to the Onion Futures Act, where moral outrage over speculation led to a ban and subsequent lack of insurance (and higher price volatility) for onion farmers. To the point that the son of the farmer who first lobbied for the ban returned to Congress to ask for its repeal.
> "What’s the person on the other side of the trade up to?"
The same thing: hedging/insuring against price changes. The supplier (ultimately, a farmer, steel mill, gold miner, electricity generator, etc) is getting a guaranteed price for the commodity they're selling, reducing risk.
Virtually no hedging happens between natural buyers and sellers precisely because they approach the market at different times, and don’t have the in-house pricing expertise to discern good and bad bids and offers ex ante. This is why, absent financial participants, the natural participants get hosed. (And why they use financial markets versus direct purchases and sales.)
Again, these aren’t theoretical considerations, we’ve always had naïve Puritanical elements seeking to ban speculation, and in some assets and jurisdictions they have succeeded. Reducing market participation has never worked.
> So you go to the futures market and take a bet that the input prices will increase. If you’re right, you win $, which makes your widget manufacturing profitable and you’re still in business.
This isn't remotely how manufacturing works. Manufacturers are focused on making the widget, for them the most important thing is that material is available, not a paper contract.
Opening a new mine is nothing but speculation, for example, and price signals from markets play a role in such decisions.
More narrowly, the ability to forward sell or buy things allows financing of production but in turn it needs people willing to take the other side. Derivatives money is a thing.
Essentially you are saying 100% of bad things are bad. Which is true, but also meaningless statement. Since it would still be true in a utopia with no bad things.
