Soros sounds alarm on oil ‘bubble’

 

By Joanna Chung in Washington

http://www.ft. com/cms/s/ 0/5dbd0ffe- 30ef-11dd- bc93-000077b0765 8.html

Published: June 3 2008 05:06 | Last updated: June 3 2008 05:06

Billionaire investor George Soros is to tell US lawmakers on Tuesday that “a
bubble in the making” is under way in oil and other commodities and that
commodity indices are not a legitimate asset class for institutional
investors.

He 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.

“I find commodity index buying eerily reminiscent of a similar craze for
portfolio insurance which led to the stock market crash of 1987,” Mr Soros
will tell the Senate commerce committee, according to a draft text seen by
the Financial Times.

“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.”

The comments by Mr Soros, chairman of Soros Fund Management, a $17bn hedge
fund, are likely to fuel a debate about the role of speculators – including
hedge funds, pension funds and other institutional investors – in the rising
costs of energy and food. The fund declined to comment on its specific
market positions.

Regulators and other officials have said surges in oil and commodity prices
are mainly due to fundamental supply and demand factors combined with a
depreciating dollar, which is used to price and trade commodities.

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.

Mr 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,” his prepared remarks say.

“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.”

Mr Soros will say a crash in the oil market “is not imminent”. But he says
it is desirable to discourage commodity index investing – or the “elephant
in the room” in the futures market – though not with more regulation.

 

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