Speaking of the financial innovation in the commodities market, this issue was something I brought quite a few times up in latter 2007 to mid 2008 [Feb 12, 2008: Wheat is Being Ruined by ... what else... Hedge Funds and Speculators] [Apr 28, 2008: Wall Street Grain Hoarding Brings Farmers, Consumers Near Ruin] when levered institutional buyers (and the investment banks themselves) went on a buying binge skewering prices. It is one thing when the Overlords of Finance effect stock prices, but quite another when they dominate pricing of items actual companies (and people) need to produce & consume. But no worries - our regulators* are on the case!
*this is where you laugh
Heck we've reached a point where a single drunken trader can move the entire global oil market by over $1.50 - that sounds like a viable and sensible system to me. [Jul 1, 2010: Drunk British Trader Moves Oil $1.65 Single Handedly]
There were many questions of why oil was staying at such high levels through 2009 and early 2010 despite utter pathetic demand in the developed market; reports surfaced that JP Morgan was buying physical oil, storing it on tankers out at sea, and then selling future contracts against their holdings to make mad money. I guess all the world is your oyster when the Federal Reserve gives you money for free, right? (wait you thought our banks were busy doing things like making loans? that is so old fashioned! Just a sideshow to their too big to fail speculation.) It appears these same games now apply to most of our metals markets as well.
I noted in a March 2010 piece a little noted transaction in which too big to fail Goldman Sachs and JP Morgan made a move to control the warehousing of said metals.
- Traders say the bank decision will reshape the close-knit warehousing industry as Goldman Sachs and JPMorgan will control the depots where more than half of the LME’s registered stocks are held. The LME is the world’s largest metal exchange.
A few months later I wrote this:
....no worries - as long as the rainmakers make their money by providing liquidity... it's all good. Thankfully early in 2010 we saw news that JPM and GS were busy buying up industrial metals storehouse capacity to help make those metals dance to their own tune.... errr, provide liquidity.
You might call me a cynic, but look at what has is happening within a few quarters. The laughable part is it has become SO predictable. Once you get used to how corporate oligarchy works - the outcomes are much more easy to forecast. (I know, I know - commodity prices are flying due to China! Just like in 2008 right?)
Remember, whenever you call anyone out for speculative excess they reply we are just providing liquidity. Per the WSJ, a lot of 'liquidity' is being provided by good old Jamie Dimon and crew at JPMorgan. These are just part and parcel with all the excesses created by a global easy money campaign by central banks, a hollowed out anti-trust laissez-faire belief system, and a captured regulator ethos.
So we'll clap like seals and talk up emerging market demand (just as we did in mid 2008 when oil hit $120, $130, $140) before we saw emerging market demand suddenly caused the price of oil to fall some 100 bucks. Who knew
levered financial institutions playing games in speculative marketsemerging market demand could change by a factor of 70% in 6 months? Thankfully, we have learned nothing from the biggest financial crisis in 80 years, and our TBTF institutions are right back to their old reindeer games - America's financial oligarchs are back baby. Bigger and better than ever. The Bernank must be beaming somewhere today....
(p.s. there is talk JPMorgan is preparing a physical copper ETF and hence their hording is for a specific reason ... but the bigger question is, what in the world are we doing having a system where a handful of players can control larger swathes of physical commodities needed for everyday commerce?)
- As commodity prices soar to new records, the ability of a few traders to hold huge swaths of the world's stockpiles is coming under scrutiny. The latest example is in the copper market, where a single trader has reported it owns 80% to 90% of the copper sitting in London Metal Exchange warehouses, equal to about half of the world's exchange-registered copper stockpile and worth about $3 billion.
- The report coincided with copper prices soaring to new records on Tuesday. (random coincidence I am sure...err, I mean it's due to China - JPMorgan is only providing liquidity, just ask them) Copper soared to a new record of $4.2705 per pound on Tuesday in New York, and is up 28.3% this year.
- JP Morgan Chase & Co. recently had a large position in copper, though it is unclear whether the U.S. bank increased its holdings, or whether a new player has taken dominant position. Regardless of who owns it, the only thing of note here is that we are being told that one person has a substantial position, said David Threlkeld, president of Resolved Inc., a metals consultancy.
- Last month, the LME reported that a single holder owned more than 50% of the exchange's copper. People familiar with the matter at the time said J.P. Morgan was the holder. On Tuesday, the LME reported that a single holder now has as much as 90% of the stockpiles, without naming the firm.
And it's not just copper ... now that Goldman and JPMorgan hold the keys to the warehouse, I bet I could guess pretty closely who dominates the holdings in all the metals below.
- Single traders also own large holdings of other metals. One trader holds as much as 90% of the exchange's aluminum stocks. In the nickel, zinc and aluminum alloy markets, single traders own between 50% to 80% of those metals and one firm has 40% to 50% of the LME's tin stockpiles.
- While commodities exchanges scrutinize all holdings to ensure a single player isn't trying to corner the market, and many of the positions are owned by big firms on behalf of clients, the large holdings do result in a concentration of ownership that could skew prices. (could? ah, such a generous view - if I own 50% of the world's stockpile of anything I could skew the price...)
- The LME has strict rules to prevent market squeezes but does not limit how much metal a single trader may hold. Instead, the exchange demands the dominant holder make metal available for short-term periods at very limited profit margins. The LME says it closely watches individual holdings.
And who owns the depots where half the LME's stockpiles are held? Hence influencing the LME? Errr.... ummm.... yes I am sure the LME has everything under control and views things in a non biased way.
- As one example, Swiss commodity trading firm Glencore International AG bought about 1.6 million tons of the metal from United Co. Rusal Ltd. earlier this year, market participants said at the time. Glencore then turned around and presold the metal. So even though the aluminum is sitting in LME warehouses, visible to all traders, it is effectively locked up. (What Glencore did sounds identical to what JPM was doing in the oil market with their storage of the commodity in offshore tankers)
And this hocus pocus trading has what to do with actual physical demand for aluminum? Oops, I'm sorry - these rhetorical questions stand in the way of 'financial innovation'. As long as a small sliver of society can take easy money and slap around commodity prices while dominating inventories, the consequences for the rest of the world are just details. Let them eat (mud) cakes! [Jan 30, 2008: Hungry Haitians Resort to Eating Dirt] [Apr 14, 2008: Food Inflation, Riots Spark Worries for World Leaders]
- These sorts of deals have skewed physical trading in these metals, as other consumers have paid increasing premiums to get hold of stocks, even though the metal looked like it was available in warehouses.
- The recent boom in metal prices has enabled traders to purchase the physical metal, sell a futures contract at a much higher price and still make a profit after paying for storage and insurance.
It's all good. Just remember, you are supporting the TBTF banks each time you buy or consume anything, or a producer passes along price increases to you due to them having to pay a premium due to financial innovation. It is our patriotic duty to make sure JPM and GS traders do well... remember, when they do well - we all do well.... trickle down economics.