[quote CA renter]Regarding taxation on commodities, what about ETFs? Long-term futures? I honestly don’t know about the tax treatment on these things. [/quote]
ETFs are not a commodities, but they are taxed the same as stocks on gain (long term vs short term). Dividends are not taxed but may be taxed in the foreign country. If taxed in the foreign country you ‘may’ get the ability to write off that tax against any taxable income in the states.
Long term futures.. I would need to double check. Most futures are posted in at under a year.
[quote CA renter]I do know someone with a lot of experience in commodities trading, and they are heavily leveraged in very, very large positions at this point in time. This person has no use for the commodity being traded. It is all speculation.[/quote]
First, realize that with heavy leverage, a bad direction change in the market can instantly wipe you out. On any leverage position, you have to have enough reserve capital to be able to cover your position. If you are leveraged 10:1 on an asset that takes a 10% hit, you are now broke! Leverage is great on the way up but really bites on the way down.
Speculation has a purpose. It allows the original producers of a good to guarantee sale at a specific price in the ‘future’. This is particularly useful for goods that take time to produce or get to market. The speculator doesn’t always win. If a speculator picks up oil contracts at $120/barrel (barrel = 42 gal. crude, 1 contract = 1000 barrels), but come contract delivery time, all they can get on the market when they try to sell the contract is $90/barrel.. they are out ($120 – $90)*1000 = $30,000. They have to have to sell the contract before the delivery date of the futures contract or else they are actually going to have to accept delivery of 42,000 gallons of crude + pay the strike price of $120/barrel = $120,000. The movie “Trading Places” has an example of what can happen when you speculate incorrectly on a futures contract (it is a bit simplified, but very real, when you don’t have the assets to cover your position).
Of course – if the price is higher come contract delivery time, or they can sell the contract at a higher price before delivery time, they can make money.
The speculation can make the market more volatile, but it can also smooth out the market. Look at it from the side of the producer. If the producer of the good has a reasonable idea of what their goods are worth, they can sell contracts for delivery when the price is higher than normal and plan for delivery on that date. If the contracts are priced below the normal market price, the producer can decide to either warehouse the goods or cut production for that period of time in the future.
A speculator can also sell contracts short if they anticipate the future price of the commodity is lower than what its current strike price is.
