Reports out of Europe a crackdown on the specs is in the works:

Brussels, like Washington, is planning to launch measures to regulate commodity exchanges and curb speculation, as well as step up transparency in food trade after the recent surge in agricultural commodity prices.

Regulators are wrongly focused on treating the symptom of speculation rather than the cause.   Go no further than Bagehot’s aphorism, “John Bull can stand many things, but he cannot stand two zero percent,” to understand what is happening in commodity markets.

Current  monetary policy has displaced and diverted liquidity into speculation.  Unlike, 2003-07, where credit expansion was fueling bubbles in almost assets,  current speculation is a zero sum game as sources of liquidity are reallocated from one market to another.   Interestingly,  gold and the soft commodities are rising at the expense of crude oil.

Liquidity is a necessary condition for speculation, but it also needs a fundamental “story.”   The drought in Russia, for example, is the spark and sufficient condition for speculation to take hold in wheat.   Ignorance of the “equilibrium price,” that is,  the “correct price” of  wheat or gold is unknown,  allows prices to significantly overshoot their fundamental value.

Increasing margin requirements on future contracts, for example, will have only a limited effect until John Bull is satisfied with a fair return on his savings. The late great, Charles Kindleberger,  is the READ and expert on speculation, in our opinion.   We were blessed with the opportunity to speak with him before he passed in 2003.