TAILIEUCHUNG - Commodity Markets and Commodity Mutual Funds

» Risk management is everyone’s responsibility. Each person and business unit in an organization “owns” a piece of risk management. Every employee should be involved in managing the risks within his or her part of the organization. Employees also may seek to be aware of risks that may affect their units but are managed by others, such as information technology risks. Employees and business units have these responsibilities regardless of whether the organization has dedicated risk management personnel, such as a CRO. » Appropriate independence makes risk management more meaningful. A process for an independent review. | ICI RESEARCH PERSPECTIVE 1401 H STREET NW SUITE1200 I WASHINGTON DC2OOO5 I 002-326-5800 I MAY 2012 VOL. 18 NO. 3 WHAT S INSIDE 2 Introduction 8 Fundamentals Drive Commodity Prices 12 Did Financialization of Commodities Drive Commodity Prices 15 The Market for CommodityMutual Funds 19 Commodity Mutual Funds and Commodity Prices 23 Conclusion 24 Appendix Regression Analysis of Monthly and Weekly Data 28 Notes 30 References L. Christopher Plantier SeniorEconomist in ICI s Industry and Flnanclat Analysis section prepared this report. Suggested citation Plantier Li Christopher I 2012. Commodity Markets and Commodity Mutual Funds. ICI Research Perspective 18 no. 3 May . O INVESTMENT COMPANY INSTITUTE Commodity Markets and Commodity Mutual Funds KEY FINDINGS Fundamentals not funds drive commodity prices. Fundamental economic factors-market demand and supply conditions-provide themostconsistentexplanation for recent trends in commodity prices. The rsseand fal I of cr n mt ciiyfrric son a monthly basis since 2004 hasbeen strongly ik l d to thevalueo f ths USS. donar and the world business cycle-in particular tothestrengthosweakness in emerging market economies such as China Brazil india n dF L . Financialization has not driven commodity prices. Despite concerns raised by some policymakers that increased commodity index investment ttlc financiaiization of commodities has driven commodity pricemovements numerousacademíc studies have concluded that index-based investinghasnotmovedpricesof exacerbated volatility in commodity markets in recentyears. Investing in commodity mutual funds provides importantbenefitsfor k v tor . Commodity mutual funds typically invest in abroadbasketofcommodiries . investing in a broad index cfcommoditicscaahelp lnvestorsofrsef tiee risk of ínvesiing in stocks or bonds Commodity mutual fundsaisoaliow eetai. ìr x orrs t ooffsefo r hedge against increases in their costsof iiving especially inceeases in foodand enerry prices Flows to .

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