I still don't get it. If people are buying and the value is not there, they will loose money, right? Speculators can also bid on a lower price (derivatives), right? So, who are all those crazy people bidding only in 1 direction (higher prices)?
Ok, that sounds like a more convincing argument than the original one.
Speculators are risking their own money re-aligning badly-allocated capital in the economy and correct prices. If they are right they earn a nice commission.
Original sellers are makers. They create and sell at reasonable price. Speculators only buy to sell at higher price, thus their only reason to exist is to be the one between people who value something more than it's previous price and those selling at previous price. And they want to buy at lower price before other people can buy at that lower price. They don't contribute anything. They just insert themselves and sell not at reasonable price, but at max price than can be paid.
Who says they are? Speculators are betting on what costs will be, but the people selling to them are (tautologically) doing it based on what it costs now. Some speculators win, some speculators lose, but I would say they’re necessarily performing arbitrage.
The way they get that number is something like this: imagine a small economy with one oil well, one gas station, and one commuter, and one speculator. The oil well owner pre-sells $1000 worth of oil to the gas station (that's $1000 in notional derivative value). The gas station owner pre-sells the same amount of oil to the commuter (that's another $1000). The commuter decides he'd rather walk, after all, and sells the same value of oil to the speculator ($1000). The speculator decides he'd rather play the soybean market anyway, and looks for someone who wants to trade oil. Alas, the only person who feels good about oil is the oil well owner, who is willing to buy $1000 worth of oil from the speculator.
Since nobody has canceled any of their speculative contracts, the notional value of the derivatives is the sum of the value of all of the trades: $5000. And yet, all but one of the participants made a positive bet (buying $1000 worth of oil) followed by an exactly-offsetting negative bet (selling the same amount of oil). So they all net out to zero, except the oil-well owner; we're all back where we started.
The problem is credit risk. If the gas station is destroyed in an earthquake, the commuter may not be able to collect on his bet with the station owner, and may thus be unable to pay the speculator, who may thus be unable to pay the oil well owner, forcing everyone to cut their spending or possibly even default. But in this case, it takes an outside catalyst, and the problem is not the derivatives themselves. The problem is credit risk. Also, earthquakes.
The same people who always take the losses - speculators. Some of them are the same people who bid the market up; some of them are people who foolishly bought at the top.
Aren't the "speculators" a bit of a boogeyman? Nobody complains when the speculators provide economic benefit (which studies say they do).
Besides the general market efficiencies that speculation has been shown to provide, sometimes the speculators drive prices down very sharply in anticipation of commodity devaluation. No one ever seems to complain about that.
If the speculators are wrong the price goes down and people tend not to complain about them. People only start bringing up speculators when they are correct.
Another thing, is that speculators add stability to the market. They predict future demand, so they buy today - driving up the price, reducing use, and then sell tomorrow. If it weren't for speculators you'd see drastic rises in prices as increases in future demand would not be offset by previous savings.
If you want to buy/sell at a price, and there's no one ready to sell/buy at that price, a speculator (of any stripe) coming in and making that deal with you means you got the price you asked for. Maybe you could have got better - that's what the speculator is hoping - but you're no longer taking that risk. Statistically, the money going to the trader is similar to an insurance premium then.
That's all "in principle" - whether the details work out right is a much deeper question.
Ah yes, the fact that the bank is no longer taking 50% of the money I paid (interest) for my house is bad...
Speculators simply follow the fundamentals. They discover prices earlier than others. That's their job. If prices are 30% higher in 10 years, speculators will make prices 30% higher today. That's all they do. Those who fail to find the correct price (they charge above 30%) will simply be destroyed when the bubble pops.
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