Over the past few days, several analysts have said the recent metals rally was purely speculative, without a fundamental justification for the price swings. But what’s speculation?
Speculation is the act of trading an asset, with the risk of losing part of all of the capital invested, in the expectation of a substantial gain. For traders to trigger a price rally there must be a fundamental reason justifying that the risk of loss is more than offset by the possibility of a significant gain; otherwise, there would be very little motivation to speculate. So, in reality, every price movement, especially in commodity markets, is speculative.
Iron Ore and Steel Rebar Prices Fall
Steel and iron-ore futures traded in China have gone into sharp decline, reversing the huge price run-up seen this year. Analysts believe that the rally has retraced because of new measures taken by exchange officials. In late April, Chinese exchanges raised margin requirements on iron ore, hot-rolled coil and steel rebar. That is, they raised the amount that investors need to deposit to trade these assets.
But are higher margins a reason for a price fall? I don’t think so. Higher margins only mean that investors enjoy less leverage, that’s not a justification for a sustainable decline in prices. Higher margins can reduce the volume traded (as investors need to deposit more money per trade) but that doesn’t necessarily cause a change in price direction. Read more