THE Speculators Thread pt 1 (merged) Archived

[halcyon]

Commodities also has a speculative bubble element and that has been growing since 2003 or so very strongly. I even have a book Commodities - the next boom from 2005

The next boom after that? Many are betting on green tech / alternative energy technology sector.

[DantesPeak]

The ones who have been complaining the most about speculators and bubbles have been the same people who have been wrong and PO and oil prices.

Lynch, Peter Beutel, and many others leading the bubble charge never thought prices would rise this high and can't see PO if it jumped up and bit them in the nose.

It's almost pointless to argue with those who don't want to take a realistic view of the situation.

If you want to know why oil prices are rising, it has to do with diesel, and I've provided the details on the diesel fuel price thread:

http://www.peakoil.com/fortopic33875-0-asc-15.html

[sjn]

Commodities also has a speculative bubble element and that has been growing since 2003 or so very strongly. I even have a book Commodities - the next boom from 2005

The next boom after that? Many are betting on green tech / alternative energy technology sector.

boom≠bubble

While recent "economic booms" in real estate, tech stocks, financial derivatives and various other co-incident Ponzi schemes have been speculative bubbles, a boom in real (sustainable!) productive economic activity, or a bull market in depleting resources does not a bubble make.

[mkwin]

And taking down the names and numbers of all the parasites who have invaded the commodities markets so we can go after their windfall profits, if necessary.

The massive rise in commodity prices since 2002 is mainly driven by the explosive Asian demand. The latest surge is largely due to the collapse in the dollar and some hedging against this.

I was watching ASPO-Houston DVD this morning and Vince Matthews discussion on minerals basically made this very point. China is the one of the top producers of a wide range of industrial resources and minerals but since 2000-2002 it has started importing vast quantities of almost all these resources despite being a top producer. China’s – and to a lesser extent India and other industrializing countries - growth is simply stretching the entire global system to its limits. Speculation is a secondary factor to this primary driver. Sure you could ban speculation, and prices might be little lower, but that could cause damage to the markets as speculators provides liquidity.

[PopeGideon]

Marxist OP wrote:

"I believe that commodities are simply the new NASDAQ, and everybody from hedge funds to illiterate crackheads like yourself is jumping on the bandwagon. It's time to clean house. "

No man, I'm not one of the crackheads, I'm one of those "rich" people you keep referencing.

Unlike you, I was smart enough to invest in oil and gold when they were half the price they are now.

You call that "the rich fleecing the rest of us."

I call it, "smart, extremely hard working guy pwns up on Marxist slackers once again."

I suppose it's a difference of opinion.

I'd guess you're the kind of Marxist who doesn't like anybody making money off of any investments.

I mean, the fact that your investment has paid you back 700% of what you invested (like me) is irrefutable evidence that you suppressed somebody, right?

And as for whether commodities are a boom or a bubble, your original post just reeked to me of a whiny Marxist who desperately doesn't want anybody making any money unless it's 3 dollars a day picking ochra by hand in a commune.

I hope your "bubble" view goes mainstream and prices come way down on all the commodities.

I will reload like a sonnuvabitch if oil goes below 90 again.

"the rich are screwing us by forcing the price of wheat up"

What a joke.

Try this - - -

Whoever you view as "us".

You, "us", are too goddamn stupid to participate in a democracy.

That's it in a nut shell.

The yous, "us", are fat, lazy, stupid, and uneducated.

You did things like vote for Reagan and Bush and Clinton - twice each.

You did things like invest in big screen TVs and granite countertops.

The whole "the rich are sticking it to us" is the joke that it is because anybody with a little ambition and a lot of hard work who was born in the U.S. in the last 40 years could have easily become one of the "rich" people buying wheat futures.

Class envy and class warfare has always and will always reek of collectivists against individualists.

I despise elitist bankers, Martha Stewart, the Bushs, the Clintons, and the rest of the thieves and liars who populate the top rung of the ladder.

But I don't confuse my hatred for them with a false sympathy for those who are too fat and lazy to work more than 40 hours a week.

[NeoLotus]

But I don't confuse my hatred for them with a false sympathy for those who are too fat and lazy to work more than 40 hours a week.

You mean like you who sit on your ass pushing money around instead of actually doing something productive?

[NeoLotus]

The massive rise in commodity prices since 2002 is mainly driven by the explosive Asian demand. The latest surge is largely due to the collapse in the dollar and some hedging against this.

I was watching ASPO-Houston DVD this morning and Vince Matthews discussion on minerals basically made this very point. China is the one of the top producers of a wide range of industrial resources and minerals but since 2000-2002 it has started importing vast quantities of almost all these resources despite being a top producer. China’s – and to a lesser extent India and other industrializing countries - growth is simply stretching the entire global system to its limits. Speculation is a secondary factor to this primary driver. Sure you could ban speculation, and prices might be little lower, but that could cause damage to the markets as speculators provides liquidity.

Indeed, real demand for limited resources is a price driver. And yes, speculation is a secondary factor. However, it must also be remembered that when gambling in stocks starts being dicey, the gamblers will move their money out of the stock market and into commodities because they are tangibles.

At the same time, everything is connected to oil in some way these days and the advent of peak production amidst lack of new substantial finds gets us back to demand for limited resources as a primary driver of prices. And let's not forget that less land used for growing wheat in order to grow corn for ethanol along with increased consumption of existing wheat stocks means limited resources again and we already know what happens to prices in that situation.

PS: Regarding speculators providing liquidity, I think all bets are off on that one for the present.

[mkwin]

PS: Regarding speculators providing liquidity, I think all bets are off on that one for the present.

I do not see why. If there were no speculators, there would be less people willing to enter into a contract with primary parties such as producers and refiners. So these primary parties would have a harder time locking in the price level they want at a specific point in time, simply because there would be less potential parties willing to take the contract. Speculators going long provide oil sellers with a minimum price level at a specific time and speculators going short provide refiners a maximum price they would have to pay at a specific time. Whether this liquidity is critical remains to be seen but it certainly makes the market easier for producers and consumers.

If speculation is getting out of hand, which it may well be, then the benefit of liquidity is out weighed by the distorting affect speculation is having on the underlying fundamental market.

[Concerned]

Pope your time is coming, the reaper approaches your ill gotten gains and hoarding WILL be re distributed.

Gird yourself communist Marxist zombies of the banking cartel approach controlled from deep within communist China or North Korea.

If lucky only your binary dollars and cents will be diluted with mammoth amounts of fiat currency creation and you can still feel good at how clever you were to invest when xyz or abc was at half todays "price".

If the communist Marxist zombie bankers controlled from North Korea are unable to "maintain stability" of your ill gotten capital allocation system then perhaps more unpredictable results of the masses rising !! pitchforks in hand with not only your wealth divided but perhaps also your head removed from it's shoulders emblazoned on a pike !!

[NeoLotus]

PS: Regarding speculators providing liquidity, I think all bets are off on that one for the present.

I do not see why.

I suppose we should distinguish exactly who you are referring to and what constitutes liquidity.

In the meantime, are you aware that Bear Stearns is going belly up, the stocks are going to crash, and anyone who put their "liquidity" into the housing market and other creative "investment" opportunities are going to be doing a "Trading Places" maneuver very soon? We're facing a major depression. See UK Independent story on that.

[mkwin]

I suppose we should distinguish exactly who you are referring to and what constitutes liquidity.

In referring to liquidity I am talking about the ease at which oil traders can buy or sell oil futures contracts.

Oil futures contracts are normally used by both sellers and buyers of oil (and all other commodities) to lock in a specific price at a specific date for a specific quantity of oil. In reality it is not normal for any physical oil to be traded but the difference between the price on the futures contract and the oil price at the point of expiration is paid to the losing party.

Without speculators it would work like this.

Total SA USA Gulf Division (for example) wants to sell 100,000 barrels of oil from its new field beginning production in September 2010.

The futures price of oil for September 2010 is currently $80; the project has a break-even profit at $40 a barrel. The price could come down or go up between now and 2010 but in order to ensure they make their target profits they buy the 100 (each contract is for 1k barrels) x futures contracts ( PUT (sell) side ) for September 2010. This means that they are effectively guaranteed to get the $80 per barrel in September 2010.

If oil was $100 a barrel they would pay the party at the other side of the contract 100,000 (1000 barrels of oil per contract x 100 contracts) x 20 (the difference between the futures price and the market price is SEP 2010) = $2 million. Now this does not matter because they simply offset this $2 million by selling the oil on the oil market at the higher level of $100, hence they still get an effective $80 per barrel, and everybody is happy.

If oil was $60 a barrel the opposite would happen. The other party to the contract would pay Total SA $2 million compensating them for the reduced value of the oil they sell in September 2010 when it is $60, hence they still get effectively $80 per barrel by selling the oil for $60 and receiving the compensation from the futures contract from the other party to the contract.

The example also works not just for producers of oil but also for consumers i.e. refiners but it works in the opposite way as refiners want to lock in a maximum price at a certain time.

In order for futures contract to work, there would need to be a producer (oil company) and a consumer (refiner) who are willing to agree on the same level at the same time. In reality, brokers and intermediates often sell one side of the contract and assume the risk themselves or sell the contract on to someone willing to enter in to the other side.

The point is, speculators, whether they are funds or private investors, increase the number of potential parties to make up the other side of the futures contract. Hence they make the market for futures contract more liquid but the majority of futures trades are between primary traders.

In the meantime, are you aware that Bear Stearns is going belly up, the stocks are going to crash, and anyone who put their "liquidity" into the housing market and other creative "investment" opportunities are going to be doing a "Trading Places" maneuver very soon? We're facing a major depression. See UK Independent story on that.

Yes of course, Northern Rock obviously being the first victim and I am sure many more are to come but it would have to be a complete contagnation of the financial system in order to affect the oil futures markets. The term liquidity normally means, however, the ease at which an asset can be turned into cash. It is a characteristic of an asset class not cash itself. You would say that the housing market has become illiquid because it is harder to sell a house at the moment.

Sorry for the long winded post. i just wanted to give a bit of context to what i was saying. So my point about the benefit of speculators seems more reasonable.

[cube]

It's getting clearer by the day that commodities are the next bubble -- the successor of the NASDAQ and housing bubbles. All the signs are there: vertical takeoff of all commodities simultaneously, massive piling on by hedge funds and J6Ps, talk of a "New Era" where prices will never come down.
....

I am a speculator. I always laugh whenever anyone blames high commodity prices on speculators. I'm flattered, no really...I am!

I never knew that I had *the power* to move markets. You're giving me more credit than I deserve.

[gampy]

The speculators will get slapped down when they drive the price too high. That's the way it works.

Actually, it isn't. Bailouts, fed cuts, etc. will soften those slaps quite a bit. All in the name of ensuring the continued operation and prosperity of the financial system. It's welfare for the banks, and stock market. The stock market is the only way the US can show some growth. It's a facade, but there you go.

The powers that be will try to sell you BS about preventing losses of jobs, keeping the economy strong,etc, but it's all about preventing the failure (deservedly) of some of these entities. We don't live in a perfect "market" system. Far, far, from it. If that was the case, the US government, the G-8 central banks would not be creating more money out of thin air to keep themselves and the unwashed from imploding. True free markets would see a lot more failures. Do you really want that? Do you want to see your 401K go "poof"? Of course not. The fact that the stock market has become the savings bank for America (due to inflation, which is entwined with all this mess) makes it harder to allow these entities to fail. Not expedient for the Pols.

It's really unfair, but THAT is how it works. The welfare will continue until there is no longer any more they can do. By that time, world wide depression, and unrest will be the story of the day. Not before.

I don't look at myself as some victim, or trod upon peasant. Far from it. Just a lazy, unmotivated parasite like most. I don't begrudge the banks, really. I would do the same in their position. The Universe is unfair. lol. Until the pitchforks (AR-15's) come out, and revolution occurs, and then we are in it even worse.

[billg]

Speculating is a fool's game. It makes no difference what your bank account looks like if you are helping to create a planet that will no longer support human life.

I cite one example among many. Let me know if you want more.

After falling for three consecutive years, deforestation in the Brazilian Amazon jumped during the final five months of 2007. While the Brazilian government had previously taken credit for the decline in deforestation, the recent rise in logging confirms suspicions that commodity prices — not policy measures — are the primary determinant of forest clearing. Grain and cattle prices have been surging in recent months, boosting development pressure on the Amazon — increasingly the agricultural heartland of Brazil.....Amazon forest loss dropped from Aug 2004-Jul 2007, before nearly doubling from Aug 2007 until the end of the year.

[JohnDenver]

The point is, speculators, whether they are funds or private investors, increase the number of potential parties to make up the other side of the futures contract. Hence they make the market for futures contract more liquid

This is the usual explanation of the utility of speculators, but IMO it doesn't really say much. Yes, speculators make the market more liquid, but why is liquidity a good thing?

Consider the classic tulip mania for example. Attracting ever larger numbers of "greater fools" into the tulip craze certainly increases the liquidity of the tulip market, in exactly the way you define. It increases the potential parties to a tulip transaction. Liquidity increases as the bubble inflates, and decreases abruptly when the bubble pops, so, in a way, you could say that liquidity and bubble are just different names for the same parameter.

When I go to the store to buy food, there's no liquidity at all. It's just me and the vendor. If I like the price, the transaction occurs. Would the situation somehow be improved by increasing the liquidity of that transaction, i.e. by bringing in speculators between me and the grocery store?

Again: Why is liquidity a good thing? How is it measured? What is the specific reason why increasing liquidity is beneficial? What is the quantitative financial benefit of increased liquidity? Does it save someone money somewhere?

Edit: mkwin, I think it's pretty obvious that inviting speculators in to create a dotcom-style bubble in food prices is not in the interests of society. So any justification of the benefits of liquidity will need to show how those benefits trump the obvious negatives of food speculation.

[JohnDenver]

The ones who have been complaining the most about speculators and bubbles have been the same people who have been wrong and PO and oil prices.

Lynch, Peter Beutel, and many others leading the bubble charge never thought prices would rise this high and can't see PO if it jumped up and bit them in the nose.

The commodity bubble is not just about oil. It's about all commodities: base metals (copper, nickel, zinc, lead, tin), precious metals, oil and other energy resources, and agricultural products.

I agree with Veneroso that oil is the commodity whose price is most justified by fundamentals. However, there are a few reasons why your points aren't that convincing:

1. The fact that prices remain high does not prove that oil is not in a speculative bubble. The dotcom bubble surged upward for quite some time after numerous people recognized it as a bubble. Lynch may be right, just off in terms of timing.

2. It's not just Lynch. Boone Pickens was recently shorting oil. He's a peak oil stalwart, and still thinks it's a bubble.

3. There's a big disconnect between concerns about the coming economic collapse in the U.S. (consumer of 25% of the world's oil) and crude prices simultaneously rising by 20% in the last month, and 10% in the last week.

[JohnDenver]

I'd guess you're the kind of Marxist who doesn't like anybody making money off of any investments.

On the contrary. I'm one of the staunchest pro-business free marketeers on this forum, as everyone knows. I do, however, question the wisdom of allowing speculators to run amok in the markets for key necessities such as oil and food.

[JohnDenver]

More info on the ongoing speculative dogpile into commodities:

"You're seeing record prices right now because of non-traditional players all coming into the market at the same time," said Larry Goldstein, director of the Energy Policy Research Foundation. "It would be hard to believe that (sovereign funds) are on the sidelines."

The average daily trading volume in crude-oil contracts on the New York Mercantile Exchange jumped to more than 480,000 in 2007, compared with roughly 280,000 the year before.

Non-commercial trading — buying and selling by investors that neither produce nor consume oil — has also risen sharply. The proportion of contracts held by non-commercial traders increased from approximately one-sixth in 2002 to one-third in 2008, according to Robert Weiner, a professor at George Washington University.

[mkwin]

This is the usual explanation of the utility of speculators, but IMO it doesn't really say much. Yes, speculators make the market more liquid, but why is liquidity a good thing?

As I explained, a more liquid market makes it easier for oil producers and refiners, who are the majority users of the futures market, to get the contracts they want at the time they want as there are more potential counter parties to the contracts.

Consider the classic tulip mania for example. Attracting ever larger numbers of "greater fools" into the tulip craze certainly increases the liquidity of the tulip market, in exactly the way you define.

You are mixing up speculation with a bubble. Speculation has happened on a large scale for decades for almost every commodity. It normally has little impact on the price and provides the liquidity benefit I defined.

When I go to the store to buy food, there's no liquidity at all.

When you go to the store you have 100% liquidity. There is a willinging buyor (you) and a willing seller( the shop keeper) and you can transact straight away. I think you need to look at the definition of liquidity. I tried to explain it in my last post, if you read it fully you should get a better idea of what people mean when they speak of liquidity in a financial sense.

[JohnDenver]

Speculation has happened on a large scale for decades for almost every commodity. It normally has little impact on the price and provides the liquidity benefit I defined.

I'm not concerned with the times when it has little impact on the price. I'm concerned with bubbles, where speculation constitutes most of the price.

In particular, what should be done if a speculative bubble/mania/craze occurs in the markets for critical commodities like food or oil?

"Speculation normally works quite well, and is convenient for the brokers" is not an adequate defense if the speculation is highly abnormal and causing severe problems in the real world.