Commodity Bubble Proponent

Why Commodities Are Likely to Struggle in 2008

Nice piece on the commodity article...I've recently sold all of my oil and soft commodity position. It's pretty clear to me the impact that the speculative interests have on this.

The biggest problem in this market is the speculation on extremely high margins. ETFs and investment banks can take their leveraged shareholder dollars, and buy commodity futures on the margins. Exchanges can print as many as people are willing to buy since no one ever takes delivery.

The amount of leverage is significant. ETFs can borrow against their initial asset base at fairly high margins (20 % assets to 80% loans). From there, they can buy commodity futures at a 6% margin. As a result, $1 in ETF assets can control $20-$75 commodity futures. This is not exactly a pretty picture.

I suspect too that major energy producers have trading desks that are involved in this game as well.