Testimony of Michael Masters before the Committee on Homeland Security and Governmental Affairs: June 24, 2008

This document is the follow-up to Masters’ original testimony, given approximately one month after the first at the request of the Senate Committee. The document is roughly equivalent in length to the first and represents no more than about ten minutes of reading, maybe a bit longer if you’re not 100 percent comfortable with the material. While the general theme is the same as the original, here Masters expounds upon the detrimental affect of Index Speculators on the price discovery function of futures markets. Not surprisingly, his argument is that heavy buying by this investor class is (was) artificially inflating commodity prices beyond the constraints of the traditional supply and demand forces. He elegantly explains the basics of the cash commodity markets (basis trading) and illustrates by example why “normal” market dynamics are (were) ineffective in combating the impact of the Index Speculators. As an active member of the cash market (oil), I can speak to the soundness of Masters’ logic and for the most part support his conclusions. Similar to the first testimony, Masters concludes by providing the Committee with a list of recommendations for legislative action. While I don’t entirely agree with his conclusions here, I thought they were educated and well-conceived.

http://hsgac.senate.gov/public/_files/062408Masters.pdf