High and volatile commodity prices have returned as a significant global issue, with the prices of many commodities returning to around their mid-2008 peaks. This paper provides an overview of the fundamental drivers of recent price trends and considers the role played by financial speculation in commodity price formation.
It concludes that recent volatility is not without historical precedent. Similar levels of (nominal) price volatility have been observed at various times over the post-war period, particularly during the 1970s. It also concludes that a series of unexpected demand shocks explains most of the variation in commodity prices over recent years.
While it is empirically difficult to completely rule out a causal link between speculation in commodity derivatives markets and short-lived volatility in commodity prices, there are strong grounds to conclude that speculation has not had a systematic impact on recent commodity price dynamics.