The Undervalued Reason Behind Price Rise

American president blames India and China for the rise in food prices. India counters with the argument that emphasis on bio-fuels by America and Europe has pushed the prices up. America thinks that the supply of oil in the market is low, and the way out of the mess is increase in indigenous production. People all over the world are protesting over inflation that is in double-digits at some places.

Amidst all the turmoil, the profiteers are reaping huge benefits.

What no one is worried about are the commodity exchanges that are thriving in all the major economies of the world. Any one with some money in his bank account can buy crude oil though he may have never seen a picture of a refinery and all he needs is a few gallons of gas per week. What he wants to do is to hold on to his share of crude till he gets the price he wants. He hoards it.

Now imagine the cumulative effect of this hoarding especially when a sizable percentage of the investors has billions to invest. On any given day, some sell and others buy but a portion of total supply is kept on hold which could otherwise have been available for refineries.

Crude is only an example. It is the same story for every commodity being bought and sold at such exchanges, be it food items like wheat, rice, edible oil, spices, and sugar or the metals like steel, gold, silver, copper, and aluminum.

Free market supporters say commodity exchanges are good; they help fair price determination. But do they? When thousands (or even millions) of persons like the one above (and a small percentage with huge money) invest in crude to sell at a later stage, they pull that much out of supply. Any one who has ever bought groceries for an extended period of time would know that with less supply the prices rise.

These commodity exchanges are a new form of hoarding. They are, in theory, for all. Anyone can invest. This illusion doesn’t let the opinion build up against them. But the real users are still the old-style profiteers and speculators who have huge funds to invest; whose individual moves push the prices up or down.

Commodity exchanges ought not to be for general public. Only those who need to physically buy or sell a commodity should be allowed to become members of such exchanges. It would be all right if the buyers and sellers in a crude oil exchange were only the crude oil producers and the businessmen who run refineries. That would truly be an open market where those who have it sell and those who need it buy.