When You Trade Commodities, Forget About Stocks

And let's be clear that when I say exposure, I mean they are looking to buy and only buy. Much of this new money is coming from indexed futures funds, which try to represent a basket of commodities in one instrument that you can buy like a stock -- although they are still biased toward the hotter commodities such as oil, metals and grains.

Mike Masters of MastersCapital has done extensive research on the rise and influence of indexed futures funds and commodity price discovery -- he testified yesterday in Washington, and his statement is available here I recommend it as essential reading to all of you.

Indexed futures investing is not nefarious, in that there are no special traders looking to "fix" prices or manipulate prices upwards to get returns -- the investors in these instruments are just like you and me, looking for another asset class that is outperforming the traditional asset classes they also hold. To put it simply, I am an oil trader, but my daily trading isn't driving up prices in oil. However, my investment in the Pimco real return commodity fund, an indexed futures fund, most certainly is.

There is speculation, but there isn't any manipulation going on. If we're really looking for someone to blame for rising commodity prices, we're going to see far better candidates by looking in the mirror than looking at OPEC.

Contracts Are Not Stock

Futures on commodities also have one key difference from all other asset classes, and it makes this problem even thornier: open interest.

If you want to buy a house -- get long houses -- you need to buy it from someone who has a house for sale. Similarly, if you want to buy a share of Citibank or Hewlett-Packard or Transocean, you also need to buy it from someone who owns a share already. I know this sounds simple and obvious except for this: This rule doesn't apply to futures on commodities.

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At the time of publication, Dicker had no positions in stocks mentioned, but positions can change at any time.

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks. Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years. Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals. Dan obtained a bachelor of arts degrees from the State University of New York at Stony Brook in 1982.