Standing up for speculators

Just as one man's freedom fighter is another man's terrorist, so is there a fine line between an investor and a speculator. Investors are perceived to be good, beneficial to an economy, courted by presidents and finance ministers; speculators are deemed to be bad. In the past few months, they have been as popular as the baddie in a pantomime, accused of distorting house prices, ramping the price of oil and generally threatening to bring the world's economy to its knees.

It is only a matter of time before speculators are blamed for climate change, bird flu and gum disease. But speculators have a long, if ignoble history. Perhaps we should not be too quick to dismiss them as a pariah. A modern economy, the experts agree, needs liquidity, and few people provide more liquidity than speculators. Their lowlife cousins, ticket touts, buy up seats for sporting events and concerts hoping to sell them for a profit. Some people take exception to this.

Led Zeppelin, at its comeback concert in London this year, condemned the action of touts and threatened that anybody who bought seats on eBay would be banned. "I don't want our fans to be fleeced," said Harvey Goldsmith, the concert's promoter. Should not we however spare a thought for touts? Presumably the performer and his promoters sold the tickets at a price they thought the market could bear. But what if between buying the tickets and the concert taking place, the performer suddenly becomes unpopular? Touts are then left with a handful of worthless tickets.

Most commentators in the West were clear what caused this year's oil price explosion. "It's the fault of speculators," screamed the headlines. For the most part these speculators turned out to be institutional investors who were investing in commodity futures. It did not bother them that we were all paying more for our petrol, nor that higher oil costs threatened a worldwide recession. They were getting a good return and their advisers would receive healthy bonuses.

Critics pointed that as trading volumes in oil on the New York Mercantile Exchange tripled since 2004, so has the price. Italy's finance minister complained that there is a "magnum of speculative champagne" in the price of each barrel. His Austrian counterpart said that the European Union should impose a tax on speculators. George Soros will always be remembered as the man who broke the Bank of England. He took massive bets that sterling would be forced out of the European Exchange Rate Mechanism, an effective devaluation.

His bet proved spectacularly successful, leading to the loss of billions of pounds by the British taxpayer, most of which went into Soros's pocket. Investor or speculator? Take away the pin striped suit and City environment and I would suggest he is nothing more than a glorified ticket tout. If Britain had been able to hang on he would have lost his shirt, just as a tout with a handful of Cliff Richard tickets might find that demand has dried up following revelations about his friendship with a priest.

Mr Soros has reinvented himself in the eyes of the world, turning from speculator to investor. Indeed, writing in the latest issue of the New York Review of Books, he goes so far as to condemn the action of speculators in oil futures. "Demand [for oil] is reinforced by speculation that tends to reinforce market trends ? In addition to hedge funds and individual speculators, institutional investors, like pension funds and endowment funds, have become heavily involved in commodity indexes, which include not only oil but also gold and other raw materials," he said.

"Indeed, such institutional investors have become the "elephant in the room" in the futures market ? In the spring and early summer of 2008, spot prices of oil and other commodities rose far above the marginal cost of production and far-out, forward contracts rose much faster than spot prices. Price charts have taken on the shape of a parabolic curve, which is characteristic of bubbles in the making ? Commodity index buying is based on a misconception. Investing in commodity indexes is not a productive use of capital."

In the housing markets of the Gulf, most notably in Dubai and Abu Dhabi, speculators have been betting that house prices will rise. They buy apartments off plan, often with a deposit of as little as five per cent, and then sell as fast as possible. By just about any definition, they are speculators. But what if they are unable to find anyone to willing to buy and they are forced to hold onto the flat until they can sell? Does that make them long-term investors?

After all, property developers, like concert promoters, have benefited from the liquidity that speculators, or touts provide. Oil speculators help airlines and other users of oil to hedge against rising prices and provide an indication of what prices will be in the future - which in turn helps producers anticipate demand. Likewise property developers who sell off plan know that they are going to get their money, one way or another.

It makes their banks happy to know that all the apartments are sold; it means that they can get on with the next project. Which is why I suggest that measures to cap speculators may be hasty, even foolhardy. Speculators can always find something else to speculate on. If not the price of oil or the price of apartments in Dubai, then perhaps trees in the Amazon or clouds in the sky. For property markets are notoriously illiquid once prices begin to fall. Unlike shares, which people are prepared to sell at a discount, property owners just refuse to sell. It is hard to make money out of a falling property market. Force out the speculators and you risk losing the initial injection of cash. Prices may start to tumble and if they do, they will not bounce back quickly.

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