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BLOG WATCH
FT Alphaville observes that “something strange is going
on with commodity
inventories” as “official stocks are rising
across numerous commodities, but analysts and
traders swear fundamentals
remain tight” with prices not falling, as would normally be expected
in such a situation.
The explanation is
that much of the inventory is being used “as collateral for bank loans. With financing
for such trades relatively plentiful, traders say that only
a fraction of the metal in bonded
warehouses is available for sale.”
They feel that the “market may be under
appreciating the influence of commodity
encumbrance … giving
rise to a situation whereby
inventory is being withheld from willing buyers, creating something akin to an artificial squeeze” which
will reverse at some point, pushing prices down.
This is news for commodities
markets because as discussed yesterday, these markets usually have little in the way of inventory relative to
new supply – unlike
gold. I would thus characterise the fact that larger amounts
of inventory are being withheld from the market means the affected commodities are becoming more “gold like”
in terms of their supply/demand dynamics.
Blogger Chris
Cook made a similar observation last year, concluding that “most commodity markets have become completely perverted by the entry into the
market of a new breed of fund investors … passive
'inflation hedger' participants who
are aiming to avoid loss, rather than actively seeking transaction profit.”
The effect of this
financialisation “is that market participants who believe that
market prices are actually set by producers and consumers are unaware that financial supply and demand are sending false signals”
and in addition, such inflation hedging
investors have to compete
with firms who have “asymmetric knowledge about the Dark Inventory thereby created” by the financial
products these firms operate.
FT Alphaville conclude
that “massive pockets
of concentrated wrong-way
risk may be appearing as a result. Exactly not what the futures markets were invented for.”
Chris Cooks’ position is that this
domination of a futures market by investors who hold massive stocks versus end producer/user
volumes will not last, resulting in a price drop.
However, if
a) the gold market has a 5,000 year history of investor demand dominating industrial uses; and
b) that this will
not change as 170,000t of stock isn’t going anywhere; and
c) futures markets were not invented for this
then
the conclusion is we should shut down all gold
futures markets? It would
certainly make many in the gold blogosphere
happy, given the fat gold finger
trade story included in today's Blog Watch.
Download today’s full
Blog Watch (pdf 192kb) for more reviews,
including:
FAT GOLD FINGER
Blogger The Fundamental View takes exception to the way this recent
event was picked up by the gold blogosphere
GOLD SHARES
On the issue of gold mining shares
failing to perform
relative to gold, Paolo Lostritto, mining equity research analyst with National Bank Financial has an interesting
explanation.
WHEN A TRADE IS OBVIOUS, IT IS OBVIOUSLY WRONG
Blogger The Short Side of
Long sees gold and silver
as
“beautifully setup to be
a contrarian trade of the
year.”
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