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Abstract
In recent years, there has been a dramatic increase in both commodity prices and the amount of institutional assets dedicated to commodity investments. While some market participants assume that these investment flows have directly led to the rising prices, there are stronger forces at work. Factors that likely have a larger impact on commodity prices include: constrained supply and underinvestment in infrastructure; growing demand and falling exports, especially from Asian emerging markets and biofuels; and the fact that commodity prices typically rise in times of a falling value of the U.S. dollar. Institutional investment is typically through futures and swaps markets, which should have a smaller price impact than purchases of physical commodities for investment or consumption.
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