4/06/2007

ACTUAL PROOF: COMMODITY MARKETS RIGGED


Are we in a strange universe? One in which pain doesn’t exist unless we make it exist? One in which down is up and a light year is only three days? Where all the laws we know about have changed?

The answer is yes. We are in a different world. A kind of parallel universe. Our markets are not what we have been taught they are or should be. The smart guys, the ones from Harvard and MIT, the ones with the degrees from all the right places, the ones who taught us the rules, have secretly invented a new world with brand new rules. And they didn’t tell us about it. We have to step out into it and be secretly violated, robbed, stomped, pillaged, and had our lives sucked out of us by a world we didn’t know existed. A secret world run by them.

Understand once and for all, the markets really ARE rigged, and even guys like me who really think we know them have been fooled. This means gas prices, copper prices, meat prices and every other commodity price is rigged, and I’m here to tell you how, with sources you can check out AND STILL MAKE MONEY.

The real deal: Goldman Sachs, arguably the largest investment bank in the world, has been using their financial clout to "stay long" all commodities, as have most of the giant investment banks around the world. This price rigging affects the prices of every commodity from the outrageous copper prices to the equally outlandish energy prices. The mechanism used to control markets are the huge billions of dollars "investment" funds, but not just any funds. These particular funds are known as "Long Only Commodity Funds" and will be called LOCF in this piece. Reprinted below is an article from Future Source (click on link to get more info) by a guy named, Emil van Essen, a Commodity Trading Adviser with long experience. All links are basically advertisements and you can subscribe or not when you link.

A commodity index is the guiding light, in particular the GSCI, the Goldman Sachs Commodity Index. So, what's an index? A commodity index is a picture of prices and movements of a variety of commodities; the contents of these indexes is known as a "basket" of commodities or stocks; it is the average price of all items in the basket that determines the price of the Index. Below is a part of the article.

How does this take place?
WHO ARE THEY? AND HOW DO THESE FUNDS WORK?

Long-Only Commodity Funds (LOCF) and ETFs are the 800 pound gorilla in the room that can no longer be ignored. These funds are big, slow, and powerful. By understanding how they function an investor can profit from the inherent predictability of these funds.

Long-Only Commodity Funds invest in a variety of futures contracts, creating a basket of commodities. Energy related commodities comprise the largest percentage of the contracts held totaling 50-75% of the total portfolio. This is due to the significance of the products both domestically and globally. Energy contracts included in the “basket” are Crude oil, heating oil, and natural gas. Other commodities included in these funds are precious and base metals, grains, meats, sugar, and coffee. The largest of these Funds is the Goldman Sach’s Commodities Index (GSCI) with approximately $55 Bil dollars invested. Other notable LOCFs include the Dow Jones AIG Commodity Index, the Deutsche Bank Liquid Commodity Index (DBLCI) and the Rogers Commodity Index.

To understand how these funds operate, let’s look at the GSCI. This Fund holds long positions in the nearby futures contract for every commodity in it’s portfolio. As expiration of the futures contracts approaches, the fund will liquidate (sell) it’s entire position in the current month and establish a new position (buy) in the next active month. This action of selling the nearby futures contract and buying the next contract month is called “the Goldman Roll” and is done between the 5th and the 9th of every month.

CAN THE COMMODITY BULL MARKET CONTINUE?

CAN THESE FUND HOLDERS CONTINUE TO MAKE MONEY?

In the author’s opinion, these Funds are a terrible investment and you should stay away from them. Yes, commodity prices may continue their rise in the future. However, it’s inevitable that prices will get too high and the weight of higher production, will force prices back down. The commodity bull market is very much like the bull market in stocks in the late 1990s. During that time, money was pouring into Mutual Funds at an unprecedented rate. This caused stock markets to move higher and higher until they greatly exceeded any reasonable fundamental valuation. The same is true for commodity prices. Investor demand rather than true supply/demand fundamentals are constantly driving prices higher. Eventually, commodity producers will dramatically increase production to profit from higher prices and prices will violently correct downward.

chart1

[clicking chart opens larger original size]

THE GOLDMAN SACHS COMMODITY INDEX MONTHLY CHART: AS MONEY HAS FLOODED INTO THIS INDEX, PRICES HAVE CONTINUED HIGHER. HOW LONG CAN THIS TREND CONTINUE?

A better alternative is to stick to a profitable trading program, or a Commodity Trading Advisor (CTA) that can profit from large moves but will liquidate their position in the commodity before the price crashes back down. The best alternative is to find an expierienced CTA that will go short the market and profit from a price crash. For most of the last 30 years, copper has traded in a range between 60 cents and $1.60. In 2003-2004, prices moved slowly but steadily higher, reflecting strong worldwide demand for copper and the emergence of LOCF which began accumulating long positions. However, in 2005 and 2006, LOCF grew by leaps and bounds. This resulted in large steady buying of copper futures, which sent prices rocketing higher. Compounding this was the fact that these funds never took profits and stayed with their positions no matter how high prices reached. Copper prices were forced to constantly move higher in an attempt to find new sellers to meet the demand. Eventually, prices will stay high enough for long enough to allow copper mining companies to dramatically raise production, which will eventually cause a total collapse of the price.As LOCF continued to grow in size in 2005 and 2006, they bought large quantities of copper contracts. This mixed with positive fundamentals led to an unprecedented rally in copper prices.

The balance of the article is here and it shows how a person who KNOWS WHAT HE IS DOING can make money on these conditions.The Long Only Commodity Funds are a powerful force that is likely to dominate the market for years to come. Like any major force in the markets, full understanding and creative thinking will allow you to profit handsomely from this market condition.

BUT, But, why? Why go massively long if you don't intend to sell? You can't make money. True, but you can if you own the real stuff; unless as a big investment bank and brokerage you own millions of shares of copper mining companies, oil companies, and so on. We're talking the biggest players in the world. They have billions in these markets. Why not throw a couple of hundred million into the game to make commodities even more valuable? And they will sell, eventually. As gasoline tops $3 and copper ditto; as corn heads to $4+ and soybeans near $8. Many are now thinking gold can go to $1,000 per ounce. See what I mean?

Responding to a dam good email question; what happens to the cash profits made when selling the long futures? First, lots of cash must be kept on hand to take care of margin requirements, BUT BECAUSE THE OUT MONTHS ARE ALWAYS PRICED HIGHER THAN THE CURRENT MONTH there is a temporary loss of cash---sell the current for .64 buy the next month at .65-- and the price of crude oil may actually come down, and in fact often does. The out months are always priced higher than the current because it costs money to transport and store the commodity. That cost is always factored into the distant months.

Posted by Howard at 4/06/2007 04:33:00 AM

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2 comments:

Anonymous said...

Are you profiting?

Fri Apr 06, 02:03:00 PM PDT
Howard said...

I don't trade energies because the margins are way too high. I do trend trade beans and silver. This information is helpful only in so far as now I know the highs may totally collapse in a single session. Just one more reason to stick with stocks.

Sun Apr 08, 06:58:00 AM PDT

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