Commodities

Discussion in 'Politics, Religion, Social Issues' started by itcheroni, Mar 25, 2011.

  1. itcheroni macrumors 6502a

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    #1
    Last night, a guest on Colbert made some comments on commodity speculation. As someone who makes his living trading, I had a lot of reactions on her opinions on commodities speculation, especially because my entire trading strategy is commodities focused. The general message of the interview was that commodities speculation was driving up the price of goods and subsequently adding to the current turmoil in the world. I completely disagree with her analysis. Here is a very brief summation of my perspective. If you have questions, I'll try to answer in more detail.

    In order to combat deflation, the fed engaged in QE and QE2, with the goal of inducing more demand. They explicitly stated they wanted inflation, but one cannot choose where inflation goes. The idea is that if there is inflation, people won't hold onto cash because that cash is losing value. They must then spend it or invest it. The fed can induce inflation by expanding the money supply but they cannot control where that money goes. They focused on creating demand by creating money while the supply in the world has stayed the same or decreased, such as the rich crop in Japan. Investors are simply putting their money into assets which will hold their value the most. When it is reflected in the DOW Jones, it is celebrated. When it is reflected in commodities prices, it is condemned.

    And another perspective of speculation is that speculation goes both ways. There is absolutely no proof that the speculation on the bull side outnumber the speculation on the bear side. This is pure rhetoric. Governments need a scapegoat for their horrible economic policies and "speculators" is a faceless nameless entity to blame things on.

    Another perspective, which most will not agree with, but I believe is true is that higher prices increase supply. Prices are going up because there is not enough supply for demand right now because, as I stated earlier, our economic policy has focused on increasing demand rather than supply and all the crisis in the world at the moment. Higher prices will cause people to seek more supply because they will be lured by the high profits. Oil at $150 will be difficult but it will spur more oil exploration and alternative energy investments causing all energy prices in the long run to come down; as opposed to subsidizing oil and trying to keep it cheap.

    I could go on forever but I'll stop here.
     
  2. hulugu macrumors 68000

    hulugu

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    #2
    Interesting. Do you have some sources or links for further reading?

    I'd also think that $150 a barrel oil would be also push efficiency technologies to the forefront, as well as other sources of power, including Alternative Energy.
     
  3. itcheroni, Mar 25, 2011
    Last edited: Mar 25, 2011

    itcheroni thread starter macrumors 6502a

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    #3
    I know not having links makes me less credible but I just watch economic news and read all day. For some interesting books that have shaped my perspective...

    Reminiscences of a Stock Operator by Edwin Lafevre
    Investment Biker by Jim Rogers
    Adventure Capitalist by Jim Rogers
    How an Economy Grows and Why It Crashes by Peter Schiff

    I also read a lot of Jim Sinclair and Dan Norcini, both of whom maintain regular blogs but it can be a bit technical at times.
     
  4. itcheroni thread starter macrumors 6502a

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    #4
    I'd like to also note that many people have been warning of inflation and hyperinflation as a consequence of economic policies for a while now. And the reply was usually, "inflation is nowhere in sight." Now it is showing up at the raw material levels and it is being blamed on speculators? It will soon move down to the retail level in a few months. This rhetoric will only heat up as consumers get squeezed. The average person will pay much more for food and heating but politicians will be able to claim credit on a higher GDP. Well done.
     
  5. flopticalcube macrumors G4

    flopticalcube

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    #5
    I think that specs can influence the price only in the short term. They usually take profit quickly and don't hang around. They provide liquidity when no one else will as well. Ubiquitous printing of fiat paper does not help. I think goods are just reflecting how worthless paper money is.

    Props to the OP for following JS and Trader Dan.
     
  6. iJohnHenry macrumors P6

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    #6
    Oh, so you are one of the reasons for the problem, and not the solution.

    Do you produce anything, or merely add cost to the value of everything, that the rest of us must pay?

    Futures trading, and the like, is not something that I approve of.

    (Awaiting the usual arguments.)
     
  7. Ugg macrumors 68000

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    #7
    You frame it as an either or equation. Black and white, yes or no, + or -. I don't think it's that simple.

    China's building boom has fueled speculation in metals, rare earths, cement, etc, etc. China has overbuilt to the point where massive numbers of developments are virtually ghost towns and real estate speculation by the chinese has led to mini bubbles. China cannot continue to build indefinitely.

    There has also been truly massive investment in farmland, especially in Africa and the Ukraine. Much of the grain or produce being grown won't be sold on the open market, but some of it will. We're already seeing somewhat of a bubble in farmland in the US, it's highly probable that there will be another crash similar to the one that inspired Willie Nelson's "FarmAid".

    The rapid shifting of billions of dollars is also in part due to highly complex computer aided trading. Bubbles are being created "on demand" for traders who are playing a game of musical chairs.

    Your continual harping about inflation is ill-founded. The world is infinitely more complex than you want it to be.
     
  8. itcheroni thread starter macrumors 6502a

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    #8
    It's difficult to engage in a discussion on trading with someone who has no experience trading or investing. I usually have to deal with a lot of ignorant assumptions. I don't know how you can criticize when you have no idea what I'm even doing.

    Does an insurance company produce anything? How do I add to the cost of anything? If you're assuming speculators bid up prices, how do you even know I'm taking long positions? Maybe I'm shorting and causing prices to come down. My particular strategy involves options and a calendar spread, which means I'm taking a long and short position on the same underlying security, which creates a net zero effect. I am primarily focused on making money through the time decay of the options. So, please, tell me how I am effecting the economy and please be specific.
     
  9. itcheroni, Mar 26, 2011
    Last edited: Mar 26, 2011

    itcheroni thread starter macrumors 6502a

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    #9
    Here is an article from November. Predicting the future is a tricky game, but this article has been pretty accurate. The timing is off, but timing is the least predictable aspect of any scenario.

    http://www.zerohedge.com/article/how-ben-bernanke-sentenced-poorest-20-population-cold-hungry-winter


    Did I even pose an equation, much less a yes-or-no one? I can't figure out what you're referring to; either or what in particular? I felt Colbert's guest gave an oversimplified and incorrect explanation, so I gave mine here. I wish you would say more than, "it's more complicated than you think." Just explain what exactly is so complicated.

    And, if you're sure about your point of view, then you should be shorting. If someone believes commodities are over valued then they could make a lot of money shorting them. I understand not everyone has money to invest, but I always wonder whether people actually believe what they say when they won't put their money where their mouth is.

    I'll be heading back to China in a month. My plan is to rent a motorcycle and visit some medium sized cities. I'll let you know if I encounter any ghost towns.
     
  10. iJohnHenry macrumors P6

    iJohnHenry

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    #10
    Is not your activity, and others like you, raising the cost of goods/services at point-of-sale??

    Just protection, but I can option who I buy from, and at what price.

    Not so with your 'service'.
     
  11. ender land macrumors 6502a

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    #11
  12. flopticalcube, Mar 26, 2011
    Last edited: Mar 26, 2011

    flopticalcube macrumors G4

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    #12
    That would be difficult to say. What the futures trader provides is liquidity and price discovery. If an oil company, or any other commodity producer, wishes to lock in a future price for a product, he sells a futures contract. Who buys it? Either a speculator or a product consumer. Specs could also work on the other side, selling contracts to consumers. They add grease to the wheels. This could actually lower the price of goods over time by making markets more liquid.
     
  13. itcheroni, Mar 26, 2011
    Last edited: Mar 26, 2011

    itcheroni thread starter macrumors 6502a

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    #13
    No, it all depends. Speculators get blamed when things go up and speculators also get blamed when things go down, like in Enron. Lay blamed Enron's low stock price on speculative short sellers. It's kind of like when you watch a boxing match and they take a telephone poll of who will win. The poll is usually close to the 50% mark, which is essentially the same with speculation in the markets. It is a poll to find the consensus price. Contrary to common opinion, speculators work to stabilize the markets. And there may be influence on price, up or down, but there is usually a reason; such as with Enron, the short sellers looked at their balance sheet and knew something was up. If short sellers could have shorted Madoff's fund, they certainly would have. Now people are claiming oil is going up because of speculators, but where is the proof? And where is the proof that oil should be less than it is now? I know there are some economists saying oil should be $20 less if speculation wasn't a factor, but I have no idea what they are basing that on. I check out the commitment of traders report every week and there's really no way to look into the mind of the people taking their positions. If someone buys one oil contract, are they speculating or hedging or genuinely long?

    Also, people who know what they're doing will not simply buy a lot of something without hedging. So their actions are actually having a neutral impact in terms of price influence. The only ones taking a major position without hedging are amateurs or people playing with other people's money, i.e. the government and large banks.

    As for my insurance question, since I personally deal with options, I view them as insurance. I sell people the right to sell me their securities for a certain price, so they don't have to worry about it falling below that price because I've agreed to buy it. I also sell people the right to buy a security from me for a certain price.

    By the way, do you not care that the Fed has explicitly stated that they wanted to raise prices? Don't blame traders for that. In fact, I think individual traders like me have as much influence on prices as surfers have influence on a wave. My actions just respond to the Fed and the action of the big players.


    That's kind of cool in a strange way. I'm going to try and work my way over to one of those towns if I can. China is another issue but I am not worried about China or the commodities market. I estimate that the bull market in commodities will last at least another 5 years. And China will continue growing, with major ups and downs, for at least another generation. Unfortunately, this means turmoil will only increase over the same time.

    Americans are viewing China's housing bubble the way we view our own recent housing bubble. I think the consequences will be different but that's for another thread.
     
  14. mcrain macrumors 68000

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    #14
    First, isn't what you are doing nothing more than just educated gambling? The same principals apply to sports (horse?) gambling. Research and analysis, followed by some guesswork, leads to your bet, which then affects the payout/odds.

    Regardless of which way you are investing, long or short, are you in any way affecting the actual "stuff" you are investing in? I think the answer is yes, if you are investing in commodities. Stock market prices are secondary markets, and price fluctuations have almost no affect on a companies available capital. On the other hand, commodity investments actually change the prices of physical stuff people use and or consume. So, where commodity brokers and their actions drive up prices in the name of making a buck, then they are responsible, in part, for what happens.

    As you pointed out, not all commodity investors are bad, not all are good, and not all results are bad, but you have to admit that there is responsibility. Right?

    I'm no expert, especially in this field, so feel free to correct any mistakes I made. Perhaps my conclusions are wrong.
     
  15. MacNut macrumors Core

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    #15
    Speculators should have no right to oil contracts unless they are going to do something with that barrel of oil. For them to just drive the price up higher for the actual retailer is wrong IMO and should be outlawed.
     
  16. flopticalcube macrumors G4

    flopticalcube

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    #16
    So says an oil consumer but what if the speculator was driving the price down? If you outlaw speculation you remove liquidity from the market. The results may not be what you wish for.
     
  17. mcrain macrumors 68000

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    #17
    It's oil, or gold, or beef, or whatever. You can't seriously be suggesting that speculators have anything at all to do with liquidity. The ONLY liquidity they provide is for the other gamblers. The oil will be sold and used regardless of what the speculators do.

    If I'm wrong, I would be shocked.
     
  18. flopticalcube macrumors G4

    flopticalcube

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    #18
    Well then, you are wrong. This is common knowledge within the financial industry. The whole concept of the futures market was to calm dramatic price swings. Before the US had a futures market, farmers would burn their crop for fuel when the price fell below the cost of transport. At any one moment of time, their may be insufficient hedgers on one side of the deal and that is where speculators can ease the price swings. There are investment speculators or position traders that will roll over contracts and possibly keep futures out of the market but they are a small part of the market compared to the frenzied trading of scalpers or even day traders. Most speculators hold a position for less than a day, often for less than a few minutes and this can be a long or short position.

    If you want to know why commodities are high, look first in the mirror and then at the government. The actions of these parties affect the price of commodities far more than a speculator could ever hope to do.
     
  19. itcheroni thread starter macrumors 6502a

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    #19
    I've mentioned this in previous posts but I'll say it more clearly, speculation goes both ways. When prices hit all time highs in the commodity markets, there are fresh speculators on the short side, meaning they are forcing the price down.

    Also, when you say speculators are driving the price up, you are saying you believe the price is higher than the actual value of the good. How do you know this? If 51% of speculators feel the way you do, then the price will be pushed down by the speculators. But let's say you're right, that it is overvalued (by what measurement I don't know) and that 100% of speculators are on the long side. That means they are going to get slaughtered, because what are the chances that each one of them will get a bigger fool to buy at a higher price? Of course such a hypothetical scenario is impossible.

    As a precious metals investor, I can tell you that gold and silver have been manipulated for years. It has been kept down by central banks who are afraid of the rise in gold. And the paper market for gold and silver vastly outnumber the physical market. Without speculation, gold would be drastically higher than it is now. That is specifically why I invest in them, because I know they are being kept undervalued, but there is only so long it can be kept down.

    You may be confusing liquidity with something else. Liquidity depends solely on the number of transactions, so I don't see how you can be shocked by the fact that more trades = more liquidity. If you plot a chart with 10 points versus plotting a chart with 100 points, which one will be more volatile. Remember the flash crash last year? It was a result of no bids. You vastly increase the chances of things like that by reducing liquidity.

    And speaking of my line of work, I can't imagine doing anything else. I've studied literature, thought I would be a writer. I went to law school thinking I would be an attorney. Nothing has made me happier than doing this. For me, it is a bridge between philosophy and science, a highly intellectual activity that exceeds anything I did in my previous schooling.... It's hard to explain.
     
  20. MacNut macrumors Core

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    #20
    Isn't the commodities market nothing more than a ponsi scheme? Speculators drive the price up way beyond the market value to make a profit then they quickly sell off leaving everyone else to deal with the aftermath.

    Oil prices are going to push 115 a barrel based on what people think will happen in Libya and Saudi Arabia. Then in 2 months when nothing happened the prices will fall yet these people made a huge profit while the world economy tanks in the process. Retailers are forced to drive their prices higher even though we have more than enough oil to cover the demand.
     
  21. itcheroni thread starter macrumors 6502a

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    #21
    By that definition, what investment vehicle isn't a ponzi scheme? Everyone is hoping to make money. One of the characteristics of a ponzi scheme is simply the transfer of money without goods. Since commodity trading involves commodities, I don't see how it is a ponzi scheme. What isn't a ponzi scheme? And what about the speculator who bought at the top? They would lose money. 98% of traders never make money...

    Yes, we have plenty of oil at the moment, but we have even more dollars. In other currencies, like the Swiss Franc and Japanese Yen, oil hasn't gotten much more expensive. Oil prices in dollars isn't a supply demand issue, it is a currency issue. The dollar index was about to drop below 75 until Bernanke started talking it up. Again, don't blame the speculators because 1) there's no evidence whatsoever they have made any impact on the price unless there has been technology invented that can read the mind of every investor on the planet and 2) the problem is due to the government and Fed's obsession with QE. For the past two years, Bernanke has stated very clearly that one of his goals was inflation. Why do speculators get blamed for rising commodity prices while the Fed gets credit for "growing" GDP? It's also interesting that most food and energy, i.e.commodities, is excluded from the CPI but is included in the GDP. If you blame speculators, then you're falling for the government's head fake.

    And, just in case you didn't know, this is the beginning of much higher inflation, and then hyperinflation. It's been happening for a while, but as when most trends, the masses don't notice until it gets parabolic.
     
  22. Blue Velvet Moderator emeritus

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    #22

    This panicked self-serving 'prediction' has been making the rounds since 2009. Core inflation projections for 2012 are less than 2%. 30 year bonds are at approx. 4.5%. The market sees no threat of hyperinflation, which I need to remind you, is usually considered at rates of 30% per annum upwards.

    Besides, central banks have proven macro-economic tools to deal with inflation. The threat in 2009/10 was deflation. I'll leave it to you to explain why deflation is a far more serious threat to the economy than inflation in a range of 1-6% or so.
     
  23. itcheroni, Mar 29, 2011
    Last edited: Mar 29, 2011

    itcheroni thread starter macrumors 6502a

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    #23
    I guess it all depends what you consider inflation. If someone drove into a lake and then checked his map, which doesn't designate a lake, would he be correct in concluding that he didn't drive into a lake because the map says there wasn't one? Many commodities are at all-time highs and the guest on Colbert was trying to blame someone. I would go with what things cost rather than the CPI and bond rates.

    Deflation isn't a threat to the economy. Yes, I said it. In fact, it's probably what the U.S. needs right now. The U.S. doesn't need to fight the fact that iPads have gone down by $100.
     
  24. Blue Velvet Moderator emeritus

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    #24
    Irrelevant analogy. Let's stick to the facts.

    Translation: I would rather ignore the real numbers and the bond markets, preferring to stoke another bubble based on false demand.

    Shallow economic and historical ineptitude. This is why people would do well to ignore the skimmers in society who add little value.

    First, in a deflationary environment, people and businesses sit on their cash. They're also less likely to borrow for investment in plant and infrastructure. When prices continue to fall, why spend? Second, wages fall along with prices, which leads to lower demand. Oversupply then occurs and people are then laid off. Unemployed people do not make great customers.

    This is pretty basic textbook stuff. We've seen it happen in the past two years which precisely why the Fed is loosening monetary policy, because interest rates can hardly go any lower.
     
  25. itcheroni thread starter macrumors 6502a

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    #25
    That is the problem. Economics textbooks are severely flawed. That deflation argument is a perfect example. According to that logic, Apple should be failing. We know their products will fall in price dramatically within a year, yet we don't wait a year to buy the first iPad; or at least it doesn't hurt Apple. Apple is thriving. Another product that we all know will fall quickly in price but is consistently a best seller is the large screen TV. Yet, economists like to look at grocery prices going down and conclude that the entire population might wait till next month to eat.

    Don't you think inflation in the U.S. is more than 2% right now? And I don't think people aren't spending because prices are falling. I think they're not spending because they don't have money. I don't see how creating inflation helps that.
     

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