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Speculative Market Moves

The classical economic theory suggests that in the free market, a commodity price is determined by the supply and demand for a commodity. The price seeks to the equilibrium position – when the number of goods displayed for sale equates the number of goods that customers are ready to buy for this price. The market moves to the equilibrium position automatically.

Goods’ demand and supply also change depending on the manufacturers’ capacities and real consumer needs. And over time, manufacturers change prices for goods, whereas without these factors the price would come into a standstill. Speculative capital boosts market liquidity, but, going by the classical theory, it does not impact the ongoing situation.

In practice, however, we often experience consequences of speculative market moves. Thus, at the break of XX and XXI centuries, nickel prices soared from 4 to 10 thousand dollars. At the same time, the index of the American NASDAQ shares had first grown twice and then reduced thrice. Even for the hardest currencies, conversion price may change for 30-50% over several years.

Today these are speculators who often cause the market’s move. For quite a long period, the price may move to the point that they set and not to the equilibrium position. Indeed, it cannot be otherwise if speculators’ capital is analogous or even exceeds the market operators’ one.

Let’s come back to the above-mentioned nickel. Its prices increased not due to the consumption growth but because players actively bought the resource. Later, the players wished to sell it for a higher price. However, generally speaking, nobody rules out that the world production of nickel will increase and the nickel price will move backwards.

A speculator has the only objective – to get profit. He can do it only through a price movement. The stronger this movement, the higher the speculator’s profit.

To ensure a significant price movement, major market players may collude. The bigger their “critical amount”, the more drastically the price will change. The process develops by itself: if many players enter the market in one direction, the market’s move in this direction will continue. It is in generation of this move that the inner speculation mechanism lies. It will reverse only when the bulk of players, who put the market in motion, start fixing the profit and make reverse deals.