is nearly three times the relative size of commodity production in the united states and far higher than that of most other industrialized countries ( see appendix, chart 1 ). in addition, commodities account for roughly one third of our exports. within canada, saskatchewan is like a microcosm of the national economy, but with commodities playing an even more important role. all ten provinces and three territories have significant resource sectors, but among the provinces, saskatchewan, alberta and newfoundland / labrador stand out ( chart 2 ). the resource sector is a major source of income and investment, and movements in world commodity prices have an outsized effect on canada ’ s terms of trade and national wealth. the relative importance of different commodities has shifted over time, with energy now representing a much larger share of total commodity production and food accounting for a much smaller, but still important, share ( chart 3 ). bis central bankers ’ speeches commodity prices in the very long run i will have a great deal to say about the exceptional short - run volatility of commodity prices in a few minutes, but for now i would like to focus on the very long run. commodity prices over long stretches of time, say 50 or 100 years, are actually quite stable. 1 yet if you follow the news you would think new price records are being reached every few days. how can one explain this apparent inconsistency? one of the answers lies in the important distinction between what economists call real and nominal prices. nominal prices are the ones you and i see reported every day. for example, the current price of oil, as i noted earlier, is approximately us $ 96. 2 however, this can give a misleading impression of how high or low commodity prices really are. since inflation generally pushes all prices higher over time, it is important to adjust commodity prices for these changes in the purchasing power of money in order to get a better sense of their true relative cost. chart 4 plots a broad - based index of commodity prices over the period 1970 to the present in both real and nominal terms. the commodities that comprise the index are weighted according to their relative importance in canadian production. as you can see, the real price line is much flatter than the nominal price line and shows more stability through time. the results are essentially unchanged if we begin the analysis as far back as the mid - 1800s or 1900. charts 5 and 6 provide a similar decomposition, but for two subcomponents of the aggregate index that are of particular interest to

, that there is more to the story and argue that zealous investors and the destabilizing dynamics of financial markets frequently cause commodity prices to overshoot their appropriate levels. before demonizing speculators, however, it is important to define what we mean by “ speculators ” and remember that most financial market activity is welfare improving. in other words, there are both good and bad forms of speculation. for the purpose of our discussion, i am going to define a speculator as someone who has no direct commercial interest in holding physical commodities but is willing to take an open position ( i. e. make an investment ) in the form of a futures contract, derivative or other financial instrument in the expectation of earning a positive return for bearing this risk. commodity producers, and those who use commodities to manufacture other products, typically want to hedge their positions. they use these same financial instruments to manage the extreme volatility of commodity prices by locking in future prices, thereby shifting the risk onto those more willing to bear it. speculators can therefore fulfill an important function. their actions permit the maintenance of active, liquid markets for hedging and assist the pricediscovery process, making the system more efficient and stable. after all, the guiding principle of buying low and selling high should actually help to reduce price volatility. those who see speculators as risk creators, rather than risk absorbers, argue that the increased volatility observed in recent years was linked to a surge in outstanding futures contracts, derivatives, exchange - traded funds and other financial products held by individuals with no commercial interest in commodities. commodity assets under management rose by more than us $ 100 billion in the past year alone, a roughly 40 per cent increase ( chart 10 ). low interest rates and a search for yield, combined with the introduction of innovative financial products and what some have termed the “ financialization ” of the commodities market, have produced an unhealthy brew, they argue. correlation, however, does not prove causation, and those on the other side of the debate cite a number of curious and seemingly contradictory aspects of the financial destabilization story. they argue that it is too early to race to judgement regarding the supposed “ dark side ” of the market. see d. gately, “ opec incentives for faster output growth, ” ( energy journal, 25, no. 2 ( 2004 ) : 75 – 96. also n. krichene