Commodity Hoarding by Funds Exposed

Interest sparked in physical commodities:

A looming crackdown in the commodity futures markets is arousing investor interest in the real thing.

Facing a limit on holdings in paper futures contracts, bankers say they have received inquiries from pension funds and other big investors about the practicality of warehousing industrial metals or chartering supertankers.

The inquiries raise thorny issues for the US Commodity Futures Trading Commission as it devises constraints on holdings of energy futures after last year’s surge in oil prices. Gary Gensler, chairman, has said he wants position limits to be consistently applied across commodity markets.

Critics say investors could respond by bailing out of futures and hoarding actual commodities, an ugly prospect in the event of a global shortage. Neither the CFTC nor the UK Financial Services Authority has jurisdiction over spot commodity markets..

So it appears that with the adoption of position limits, the thin veneer covering the practice of commodity hoarding will be stripped away. When Mike Masters and I wrote the reports "The Accidental Hunt Brothers", we were criticized by people who said that it was unfair to compare pension funds and hedge funds with the famous Silver Hoarders the Hunt Brothers. These critics argued that commodities were a valid investment because they had a yield (the “roll yield”) that could be earned in the futures markets. Now we see that these funds don’t care about the fictitious “roll yield”, they just want to extort money by hoarding commodities and driving up the price. They want to take a page from the Hunt Brothers’ playbook and gouge everyone on the planet who consumes gasoline or food.

There is no investment rationale for buying and hoarding physical commodities. Physical commodities, like food and energy, are inventories! They are not the means of production. They pay no interest, dividends, rents or cash flows. They cost you money to store and unlike gold they have no history as an alternative currency.

If you like Disney (DIS), buy the stock or the bonds, don’t buy all the tickets at the theme park. That makes no sense unless you are planning to scalp them to people for more than you paid for them.

Comments

[john s. gordon:]

well the chinese govt hoards commodities so why not everybody else too?
my house is too small to hoard anything.
> jack

Oct 20 08:56 AM

[Positroll:]

"There is no investment rationale for buying and hoarding physical commodities."
The "investment rationale" is the same as for buying anything else: to make money.
At the same time, [non agricultural] commodity buying by funds at low prices helps to keep mines open and allows junior enterprises to keep exploring, reducing later spikes. Higher oil prices reduce waste and CO2 - "peak oil" or not, that's a positive.
As for the individual consumer, he can do the same I did: buy some etf's when the price of oil is low, sell them when the oil price peaks, and use the proceeds to fill the tank of his car ...

Oct 20 09:40 AM

[Steve in Gr...:]

I love it. Despite the central planners' efforts to manipulate and distort the market (by imposing position limits), the market and its participants will find a way.

And your statement "...There is no investment rationale for buying and hoarding physical commodities..." is simply wrong on its face.

Take oil as an example. An individual sees the geopolitical situation in the Middle East as fundamentally unstable and likely to lead to war. He rents a tanker and fills it up with oil and waits. If there is war, he makes a bundle, but also he has done the world a favor by increasing the available supply of oil (from his tanker) when oil from the Middle East is cut off. If there is no war, maybe the individual gets hurt, but that is the way markets work.

Oct 20 01:27 PM

[Gangy:]

Positroll,
Try hoarding $10million of gasoline in any city of USA. The local and federal govt will come shoot you down for physical hoarding. Then why is hoarding(unlimited position limits) allowed on limited physical inventories?

There is only so much gasoline in the world. With billions upon billions dollars available to investors in the form of pension funds, ETF's, bank investments, massive profits from oil companies etc. amounts to nothing but cornering the market.

Higher oil prices do not reduce waste or CO2. People will travel where they have to. And they have to pay for higher gas prices. Remember each and every one of us. Even little children have to forego small necessities to make these bankers rich. Everyday, every minute. Work equals money. Basically you are making everyone slave to make these conmen rich.

Higher (artificially created) crude prices hurt our nation even more. Does Iran ever say "give us $140 for a barrel for crude". No!. We raise the prices and like fools are giving away our nations wealth to our enemies. Making them stronger. Only a fool works for his enemies.

Hoarding to raise the prices later is wrong. You can give it the name of ETFs or whatever. It is still hoarding to make a profit later.

JP Morgan Chase made 3.2 billion (record profits) in the last quarter (2-3). From where? They never give out the finer details. The economy is doing so poorly that in all likelihood this money came from manipulating the gasoline and crude market. Right now there are no position limits for bankers in the energy market. Basically by hoarding on the stock exchanges.

Oct 20 01:31 PM

[Gangy:]

This comment is for Jack above.
Chinese have an army too. Does that mean that everyone can have their own army?

Oct 20 01:35 PM

[Bob Mayo:]

People hoard real estate, buying more land and apartments than they could ever use themselves in a lifetime. Should it be illegal to own those too? Oh, and people also hoard things like automobile factories, buying more fractions of automobile factories than they will need to make the, say, 30 cars they will own in their lifetime. Should owning parts of factories be illegal too?

Oct 21 02:11 AM

[Endo:]

Hording, as described here, is not investment but speculation. It is time we learn the difference. It can also be a store of wealth (savings) or a hedge (against future shortage by one who uses or supplies the commodity). A hoard does not create wealth by adding value as a mine, mill, or factory does and therefore cannot be depended on to appreciate reliably.

What makes hording so odious is not speculating in the marketplace to make a profit. It is using the Fed's nearly free and inexhaustible credit to do it--using the Fed's inexhaustible supply of "capital" to bid up the world's finite resources--ultimately extracting their profits from us, the consumers, by further debasing our medium of exchange and setting the world up for another crash. For this, the Fed should be fully audited and the investment banks taxed into submission or oblivion.

Oct 23 01:41 AM

[bob adamson:]

Recent history has shown that there is a spectrum ranging from hedging at its most economically useful to hording at its most economically destructive. There is a critical need for the development of a sound basis for identifying a reasonable boundary where hedging by financial and investment institutions becomes hording and regulating the nature and extent of crossover permitted for those institutions.

The massive size of the secularized debt and derivatives market and the sophistication of IT technology and the assumed sophistication of the programs for use of that technology to trade in that market globally exponentially increase the need to resolve these questions intelligently and soon.

Oct 24 12:54 AM