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Mark Anthony, is an IT professional and who had a scientific research background before joining the information revolution. Visit his blog: Stockology (
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  • Hot Money, Hot Commodities and the US Dollar Carry Trade Part 2 3 comments
    Oct 29, 2009 11:08 AM | about stocks: FSLR, GLD, INTC, PAL, PALL, SLV, SWC, UNG

    In the last part of the article I discussed the reason why the collapse of the US dollar is all but inevitable, but the US economy itself will be strong enough to survive. Let me say it again, collapse of the US dollar does not equal to collapse of the US economy. If the dollar becomes worthless, Microsoft (NASDAQ:MSFT) or Intel can sell their hardware or software products for gold or coins. They can still manage to make a profit, because the world still want their products.

    How do investors protect themselves during a currency collapse?

    First, the majority of investors and the majority of average American people will be wiped out financially. That is a FACT of mathematical statistics when a country's currency collapses. Majority of people will be wiped out, but a selective few in the minority will be able to rip huge profit from the crisis. If you want to protect yourself, you can not be with the majority. You must be with the minority group of people. Do NOT let other people do the thinking for you.

    So are you listening to the most popular economic analyst or the most popular financial TV host? If you do, you are in danger because you are together with the biggest group of fools! You find safety when you are forced to jump from a big boat to a small boat, not the other way around. Just ask Titanic survivors how they survived. They jumped onto very small boats instead of wait for something bigger than Titanic to come to their resque. Safe havens must necessarily be small and can not accomodate too many people.

    Commodities are the only safe haven. As Jim Rogers said, commodities are the only asset class with fundamentals impaired, but improved. But there are lots of myths in the commodity investments. Even Jim Rogers himself had also spreaded some incorrect myths regarding commodities investment. Most people do not know how to invest in commodities because they have not even once laid their fingers on any physical commodity. The only thing they have ever touches is a computer keyboard and mouse. A computer and a brokage account is all you need to invest in commodities, right? Wrong!

    The door for commodities investment is extremely narrow. Let me tell you a small story. I am a big fan of tellurium investment and hoard actual physical tellurium. The price low of tellurium a few years ago was about $10 per pound, recent high was about $140 per pound. I predicted tellurium price could go to multiples of gold price once phase change memory goes into wide application. Almost every one laughed at me. Some, a few, did take me up seriously but they ask me NOT where to buy the physical tellurium, but rather, where to buy paper future contracts of tellurium, or what mining stock they can buy. When they hear that these two investment instruments do not exist for palladium, they left with disappointment. Most market traders do not know what to do with physical asset. They would rather prefer the convenience of pushing a computer button to instantly buy and sell something. Till this day, I think there are far fewer tellurium investors than people who understand Einstein's Relativity.

    I believe that pure computer trading is the wrong way to invest in commodities. To invest in commodities you HAVE to get your hands dirty and lay your hands on the physical things. Let me explain using the example of the United States Natural Gas (NYSEARCA:UNG) fund.

    Recent dismay performance of UNG gave me pause to think about how to invest in commodities. Natural gas spot price recovered from the low of about $1.84 to now nearly $5, almost a triple, but the share price of UNG still struggles around $10. Why is UNG not tracking the price of the natural gas itself? The simple answer is it's killed by contango. But there is a deeper reason.

    UNG does not hold the physical natural gas. Instead they hold futures contracts. In theory, when natural gas price goes up, the asset value of these futures contract also go up. But in reality such methodology is flawed. You are holding future contracts that you never intend to take delivery. So near the expiration of the future contracts, you are forced to sell them, at any low price. Mean while you must buy the next month's future contracts, at whatever high price they are offered. As a result, in each round of the roll-over, UNG loses positions and loses money.

    More over, the more investors are interested in UNG, the worse a situation UNG finds itself in. (Remember, the bigger crowd is always the loser!!!) During each roll-over, UNG could be purchasing more future contracts than producers have products available to write those contracts, hence it bids up price on the buying end. Then it turn around to sell the future contracts to industry consumers, it has more to sell than the industry consumers can buy, hence it pushes the price down on the selling end. How could you not lose money? It's like two mechants compete with each other. They bid the price up purchasing produces from the same farm, and then cut each other's throat to sell to customers at super low prices. Both lose.

    Since UNG purchases future contracts that it never intend to take delivery, conceiveably on the other end of trade could be some one who write future contracts that he never intended to deliver, as he does not have the product to deliver. As no delivery is ever demanded, such paper future contracts can be created out of thing air in unlimited quantity to "meet" investment demand. Basically one side provides empty promises of supply, the other side provides false demand that never materializes. This is nothing but a zero sum game. One party's loss is exactly the other party's gain.

    Therefore it is flawed to believe that trading future contracts is investing in cmmodities. It is NOT. Future contracts are derivatives with which the two sides gamble against each other. The commodity may be bullish, but you have a 50/50 chance to beat your counter party to win.

    If you are interested in commodity investment, do NOT buy paper derivatives, whose supply is unlimited. Buy the physical thing, which is limited, and take delivery.

    Now from a fundamental point of view, every investor needs to ask: If I invest in something and I gain, WHO pays for my profit? You are not the FED so you can't create money out of thin air. If you make a profit, then some one or something must be paying you that profit. If you buy a stock and make money, it's because the business of the company generates revenue and income, or because another investor pays you more than your original cost. I invested in physical tellurium because I know some years down the line, First Solar (NASDAQ:FSLR) or Intel (NASDAQ:INTC) will pay me gold price to buy my tellurium hoard.

    But who pays for your profit when you invest in a commodity? Do your fellow investors pay you? If so it sounds like a Ponzi scheme. It has to be industry users of the commodity that pays you the profit. The only way for you to get paid by industry users, is for you to participate in the supply and demand of the commodity, for you to become a physical demand and then a physical supply. That means the only sensible way of investing in commodities, is for you to take physical delivery, hold for long term, until the price is higher, then you sell to the industry users.

    Once again, The door for commodities investment is extremely narrow. Most of supply and demand have been directly negotiated between industry suppliers and industry users, leaving you no opportunity to participate in the market. Natural gas is a good example. The opportunity to store natural gas is virtually non-existant for outsider investors. Any gain or loss is likely directly settles between industry suppliers and users, and that leaves investors out of the natural gas business and unable to rip profit from the price appreciation.

    So if you think investing in commodities is as easy as pushing a computer button, and you do not have to deal with the huzzle of buying/selling, transporting and storing the actual physical stuff. Please pause and think again. WHO PAYS YOUR PROFIT if you are not taking all the huzzles?

    For this reason I am inheritly suspicious about all sorts of commodity ETFs, like GLD and SLV. Particularly SLV. Read my previous Instablog regarding some red flags in the SLV fund. What troubles me is that these nice folks help you to take care of all the sweating and laboring to handle the physical stuff, and allow you comfortably making profit sitting in front of a computer. It just sounds too good to be true.

    (to be continued...)

    Full Disclosure: The author is long precious metal palladium and silver, hold big positions in palladium mines SWC and PAL, as well as SSRI and CDE. I hold shipping stocks like EXM, EGLE, TBSI, DRYS, and small positions in natural gas fund UNG. I short the US dollar by holding some long positions in margin brokage account.

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Comments (3)
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  • Stonebridge
    , contributor
    Comments (5) | Send Message
    You make an interesting proposition, but I think there are a few flaws with your reasoning. First, individual speculators CAN make profits on commodity futures. For example, when oil prices were very low they could have gone long a long-term futures contract and sold it when the price of oil advanced dramatically. When the price of oil was very high ($130) they could have shorted the long-term futures contract and then closed their position after oil had dropped to $50/ barrel. Yes, they would be taking their profit from other speculators, but so what? They are still making a profit. They do NOT need to continually roll their positions or always be invested in a single commodity; jusy buy low and close the contract when it is high.


    Trying to take physical delivery and storage of most of the hard assets is insane. Furthermore, have you ever actually been able to SELL your telerium? Why don't you try it sometime? I've got bad news for you. Most producers who need a commodity only buy it from certain suppliers OR they buy futures contracts and take actual delivery when they need it. Intel will NOT be buying telerium in small quantities from an individual investor like you, unless you offer it to them at a big discount to the market price! Why don't you actually try to sell your telerium hoarde to Intel sometime? You will not be able to. They will laugh in your face. So all your telerium profits are imaginary since you can't actually sell the stuff to anybody and you are not a computer chip manufacturer yourself. You wasted your money on a bunch of junk that you can never sell!!!
    12 Nov 2009, 06:08 PM Reply Like
  • titan_777
    , contributor
    Comment (1) | Send Message
    Dear Mark Anthony,
    I am Japanese.
    How do you think when commodity ETF collapse?
    I am glad to you if you answered me how you predict to ETF's collapse period.


    My position is below.
    I have a gold ETF(reverage),SllverET...
    I plan to invest a rice(US),wheat(Cicago) ,sugar(US) by CDOin near future.
    23 Jul 2011, 03:41 PM Reply Like
  • Chickenpookie
    , contributor
    Comments (141) | Send Message
    titan - ETF doesn't collapse, it is a time decay. Please read and understand the ETF prospectus carefully, the mechanism is explained there, in the risk section. ;)


    Happy investment experience!
    13 Aug 2011, 12:43 AM Reply Like
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