- Billionaire investor George Soros is expected to tell United States lawmakers on Tuesday that “a bubble in the making” was under way in oil and other commodities and that commodity indices were not a legitimate asset class for institutional investors.
According to the report by the Financial Times, Soros is expected to tell a congressional committee that rising oil prices are the result of a number of fundamental changes and factors in the market, but that the relatively recent ability of investment institutions to invest in the futures market through index funds is exaggerating price rises and creating an oil market bubble.
He is expected to tell, “I find commodity index buying eerily reminiscent of a similar craze for portfolio insurance which led to the stock market crash of 1987,” to the Senate commerce committee Soros, according to a draft text seen by the FT.
“In both cases, the institutions are piling in on one side of the market and they have sufficient weight to unbalance it. If the trend were reversed and the institutions as a group headed for the exit as they did in 1987 there would be a crash.” Soros was quoted as saying.
Soros’s comments are seen likely to fuel a debate about the role of speculators in the increasing costs of energy and food. While, Soros Fund Management, a $17bn hedge fund declined to comment on its specific market positions.
Fundamental supply and demand factors combined with a depreciating dollar, which is used to price and trade commodities, are mostly seen as the main reasons for the surge in oil and commodity prices, by regulators and other officials.
However, some politicians believe that the new wall of money entering the asset class through commodity indices is a key factor. Tuesday’s Senate hearing into energy market manipulation and federal enforcement regimes is one of a series of held in Washington in recent months examining aspects of the market.
Soros said index-buying was based on a misconception and commodity indices are not a legitimate asset class. “When the idea was first promoted, there was a rationale for it ... But the field got crowded and that profit opportunity disappeared,” Soros said in his prepared remarks quoted by the Financial Times.
“Nevertheless, the asset class continues to attract additional investment just because it has turned out to be more profitable than other asset classes. It is a classic case of a misconception that is liable to be self-reinforcing in both directions.”
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