Wednesday, May 21, 2008

Guambat delivers commodity speculation cure

OK, so the headline title to this post is over the top. But so is all the recently arrived hyperventilation about speculation in the commodity pits.

Why, the uproar has grown so loud that even Jumpin' Joe Lieberman has chimed in: "speculative demand -- divorced from market realities -- is driving food and energy price inflation and causing a lot of human suffering" according to the LA Times piece, "Are commodity traders bidding up food, fuel prices?" According to this piece,
The link between soaring prices and the vast sums of money flowing through commodity markets is controversial and hard to quantify.

Economists, traders and regulators routinely dismiss the notion that excessive trading is the culprit instead of traditional market forces such as supply and demand. And they warn that increased regulation could interfere with trading programs used by airlines and others to blunt the negative effects of rising commodity prices.

Jeffrey Harris, chief economist at the Commodity Futures Trading Commission, told lawmakers Tuesday that the high prices reflected increased demand from emerging markets and decreased supply because of bad weather or geopolitical events.

Harris and others also pointed to broader economic factors such as the sinking value of the dollar, which has made commodities traded in the United States a relative bargain for foreign investors. Commodities also have recently offered more certain returns than the stock market.

"Together, these fundamental economic factors have formed a perfect storm that is causing significant upward pressure on futures prices across the board," Harris said.

Such explanations are less than soothing in the face of the unprecedented price hikes, which have alarmed consumers and politicians and yielded unusual alliances.

Fearing that Joe Lieberman is going where no NYT commentator has gone before, and demanding space on this bandwagon is the NY Times, borrowing a story from Bloomberg: Limits Weighed for Commodities Investors

The seminal Bloomberg story carries the outrageously populist pulp that,
"We may need to limit the opportunity people have to maximize their profits because a lot of the rest of us are paying through the nose, including some who can't afford it," said Lieberman, a Connecticut independent.

Guambat is feeling a bit of agro about these joey-come-latelies. After all, two years ago Guambat was posting about the abuses in the commodities exchanges by the new financial wizards in his post Can't cop it anymore.
Guambat has railed at the changes experienced in the various world markets with the invention of new "financial products" and the unleashing of the large funds and brokers to pursue them any where, any time, and any way, without (much) regulation or oversight (see, for instance, Risque business).

Now its the turn of the copper users industry to have a go.

COPPER users have threatened to turn their backs on the London Metal Exchange, alleging hedge funds are driving copper prices to speculative extremes that no longer reflect supply and demand.

In a letter to the LME and the Financial Services Authority, the International Wrought Copper Council said that its members faced severe difficulties financing deliveries.

"This market, where speculators can buy what does not exist, is doing serious damage to our industry and will bring into question whether the LME copper price should continue to be the recognised reference price," it said.

"This is a feeding frenzy driven by hedge fund speculation. This would not be happening if the price was left purely to industrial supply and demand. The market may be tight, but it is well-balanced.

"You have to take it with a pinch of salt when the LME claims it is managing this market on the basis of industrial demand," Mr Payton said. "I'm not sure their methods can detect whether wolf-pack speculators are manipulating the futures markets three months out."

Using basic supply and demand fundamentals to forecast commodities prices is still the norm to a large extent, but the spectacular price rallies of the past year beg the question of just how relevant fundamentals have become given the enormous amount of fund money flooding the markets, say Edwar Meir and Fred Demler of Man Financial.

OK, so, what's the cure?

Simply make commodity futures contracts deliverable only; no cash settlements. You wouldn't have to do that for long. After 6 - 12 months, the finance wizzies will have pissed off. The last thing they want in their pockets is filthy commodities.


ANN DAVIS has a report on May 23rd in the WSJ that notes these "anomalies", shall we say, in the commodity markets, where "commodity markets have been in the grips of a painful financial squeeze".
[L]arge, well-capitalized commodity merchants were taken by surprise when a number of agriculture contracts soared nearly simultaneously this spring.

Wheat hit a record high in late February, nearly tripling from last year; soybeans and cotton both saw big spikes March 3.

Orange juice "futures edged to new contract lows against a backdrop of bearish fundamentals and a weak technical trend. Speculative funds have been liquidating long trades..."

Even large, well-capitalized commodity merchants were taken by surprise when a number of agriculture contracts soared nearly simultaneously this spring.

Wheat hit a record high in late February, nearly tripling from last year; soybeans and cotton both saw big spikes March 3.

Oil's 15% rise this month has surprised even experienced players in the energy market. [M]arket players, particularly speculators who misjudged the top of the market, are being forced to buy oil futures to close out bad bets. [S]ome traders put big money into complex trades in the fall that fell apart when price relationships flip-flopped the last few days. The market is beset by talk that large producers "wanted to unwind their hedges, putting upward pressure on prices."



Anonymous little john said...

geez us finance wizzies have been copping a bit lately.
How am i supposed to feed the kids without cash-settled triple-A rated commodity-backed anograms?

22 May 2008 at 4:56:00 pm GMT+10  

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