2002. 2 it remains to be seen whether the increased supply will be sufficient to bring prices down significantly. the depletion of easy - to - mine resources has contributed to a significant rise in extraction costs. other factors might also push in the same direction : for instance, it is possible that the internalisation of external mining costs, previously born by society as a whole ( i. e. through the degradation of the natural environment ), might contribute to commodity prices remaining at elevated levels. with regard to gold, on the other hand, i am doubtful that the main source of uncertainty is related to surprises in future mining supply or fabrication demand. as i mentioned before, absent new vast discoveries, investment demand will arguably continue to dominate future gold prices. third argument : today's commodity investment boom is structural and will be long - lasting let's turn our focus to investment demand. in recent years, institutional and private investors appear to have rediscovered commodities as an asset class. according to some market estimates, investment in commodities has surged tenfold since 2003 and amounted to usd 120bn in may 2006. many market analysts see this increase as the beginning of a new trend : their argument goes roughly as follows : if all pension funds had only 3 % of their assets invested in commodities, this would represent a total investment of more than usd 500bn. 3 the gold market has also benefited from a surge in investment demand. according to market specialists, net investment exceeded 700 tonnes in 2005. exchange - traded funds ( etfs ) have become particularly popular because they give investors the opportunity to make flexible and liquid investments in gold, even for small volumes. at the end of 2003, gold etf investments accounted for less than 20 tonnes. today, they likely exceed 500 tonnes. does the risk / return payoff of commodities justify this new interest? empirical studies have shown that the inclusion of commodities as an asset class improves the efficient frontier of a portfolio. nonetheless, we all know that returns and correlations can change. with respect to correlations, there is arguably no compelling reason why low correlations between commodities and bonds or equities should change significantly going forward. the case for diversification with regard to investing in commodities may therefore well remain intact. with regard to returns, however, things appear more complicated, particularly if we base our analysis on the return of commodity futures indices. in the past, most commodity markets have been in backwardation : futures prices were lower than the spot price. this was beneficial to

janet l yellen : improving the international monetary and financial system speech by ms janet l yellen, vice chair of the board of governors of the federal reserve system, at the international symposium of the banque de france : regulation in the face of global imbalances, paris, 4 march 2011. * * * improving the international monetary and financial system nearly four decades have elapsed since the demise of bretton woods, and during that time, the international monetary and financial system has undergone a significant transformation. the changes that have occurred reflect deliberate policy choices by the official sector as well as the organic interactions of investors, institutions, and advancing technologies. judging by the standards of global economic growth, stable prices, and financial stability, the international monetary and financial system, in its current incarnation, has a decidedly mixed record. wrenching crises and economic distress, notably including the difficult experience of the past several years, have punctuated periods of solid growth, low inflation, and financial stability. thus, the subject of today ’ s discussion is vitally important, and i am pleased to contribute my thoughts on steps we can take to improve our international economic order. 1 in evaluating our policy priorities, i find it helpful to distinguish between the international monetary system and the international financial system. 2 the international monetary system is the set of rules, conventions, and institutions associated with monetary policy, official capital flows, and exchange rates. it also includes mechanisms to provide official sector support to countries facing funding pressures. the international financial system is much broader, encompassing both private and official participants in global financial markets. i consider this distinction important in thinking about how to reduce the incidence and severity of future crises while preserving a prosperous global economy. in the case of the recent global financial crisis and recession, i would apportion responsibility to inadequacies in both the monetary and financial systems. with respect to the international monetary system, the basic story is now quite familiar : strong capital outflows from countries with chronic current account surpluses – in part reflecting heavily managed exchange rates, reserve accumulation, and other shortcomings in the operation of the international monetary system – put downward pressure on real interest rates, in turn boosting asset prices ( particularly for housing ) and enhancing the availability of credit. these developments contributed significantly to the buildup of financial imbalances, but they were not, on their own, sufficient to have engendered the massive financial crisis we experienced. had the additional domestic credit associated with these capital in