Chris I think there is more to it than that. A commodity producer has two items to look at. Cost to produce the product and the price he can get on the market. A lot of gold mines are barely profitable at $300 per oz. So right now if the accounting department can sell a forward contract 3 months out for 1,000 ozs at $600/oz, they have a $300 per oz profit without any speculation on their part.
From there, you have puts and calls on the commodity. An airline will normally buy staggered calls covering the whole year for jet fuel. This guarantees them a known cost for fuel for the year. One of the reasons the last airline went into bankruptcy it because they thought that the price of fuel would go down and they figured buying the options was a waste of money.
If you were a corporation or bank that had $10,000,000 for example in another country (you sold your corporation or sold a lot of hamburgers) and wanted to guarantee that if they devalued the dollar you would still get your full amount, you would buy puts against the dollar.
The options are mostly for removing risk from a transaction. From there, you have the underwriter (pronounced speculator)of the option, that person is willing to take the risk for a price for a certain lenght of time. If you bought 100 shares of Google and sold calls at $40 above todays price, and the stock rose $40, the stock would be called away from you at todays price +$40. You made money, go do it again. If the stock drops $40, the option won’t be called, but you broke even for the day.
The real trick is timing. Warren Buffet had a bet that the US dollar would fall, and everyone knows that its an absolute certainty. He lost 2 billion.
Then there stupidity. Take the California legislature that noticed that the contract price for natural gas was 3 times the spot price on the commodities market. They decided not to renew the long term contracts and buy on the cheaper spot market. The reason that market was so dull, was because everything was on long term contracts. What happens when a 90% market consumer, switches from contract to spot–lets just say it was a pretty dumb move.
Speculators do make money now and then– Its kind of like horse race betting, you either do it for two years and quit or move closer to the track and live in a trailer.
