Derivatives DOES not cause long term price bubbles

[bullboy8]

If somebody orders oil without intending to receive delivery, when the delivery time comes, he will have to sell it. Although his prior action will have artificially increased demand and thus the price, his second action will increase supply and thus lower the price. How can this lead to a long term rise in commodity prices?

also If someone buys a derivative which does not involve ordering the physical commodity, (as in the case of say gold) how can this cause the price to rise? I would be grateful for any knowledgeable readers who take the time to adresse these precise matters.

 

[Adamus]

There are many other derivatives as well as futures and forwards. For instance, CDOs and credit default swaps.

 

[Rhody Trader]

also If someone buys a derivative which does not involve ordering the physical commodity, (as in the case of say gold) how can this cause the price to rise? I would be grateful for any knowledgeable readers who take the time to adresse these precise matters.

Keep in mind that in almost all cases if you follow the chain of transactions you end up with a trade involving the actually underlying. For example, a seller of gold calls could hold gold as a hedge.

 

[MrGecko]

...and the size of the derivative markets can smother the underlying - sometimes the effect can change the cause, if you like.

 

[gooseman]

whatever you buy/sell in the derivatives market will have to be hedged-ultimately by the creator of the derivative so yes, it's leveraged and as G says can smother the underlying, but somewhere down the chain will be the physical hedge.