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How Commodity Flows Impact Your Investment Portfolio

It was 8 a.m. when my direct line on the trading desk rang.
Hello?

“Is this Andy Hecht?”

Yes…

“This is the FBI. We want to talk with you.”

What for?

“Not over the phone. Meet us at Tall Ships Bar in lower Manhattan at 4:30. Come alone.”

The line went dead.

That call came 20 years ago when I was in charge of the global precious metals trading desk at Salomon Brothers in New York City. What could the FBI possibly want from me?

I was about to find out…

The bar was on the ground level of the World Trade Center. I parked myself on a bar stool and ordered a Dewar’s on the rocks.

It wasn’t long before the FBI showed up. I recognized them the moment they walked in. It must be customary for agents to travel in pairs. They looked like clones. And they stuck out like two sore thumbs.

I offered the G-men a drink. But they politely refused. They were not allowed to accept anything from me. After spending five minutes with these two characters, I needed another scotch. At their request, we moved to a quiet table away from the bar.

As soon as we sat down, the grilling began…

“We Know You’re in Bed With the Russians. We Want Information.”

The Berlin wall had come down two short years earlier. At the time, all Russian enterprises were still tied to government agencies.

I had just negotiated a joint venture between my company and Almazjuvilirexport or “Almaz” for short. Almaz is a Russian enterprise that markets and exports platinum group metals (PGMs) around the world. This joint venture was the first of its kind for both a Russian company and a Wall Street investment bank.

With this new venture, Salomon would receive the majority of all the PGMs destined for North America. This was great for my business. I would be the supplier to Ford, General Motors and Chrysler, to name a few.

The Russians gained direct access to the U.S. markets through Salomon. Three Russians from Almaz came to work in my department in New York City. Boris, Alex and Dmitri were good guys, and they knew the business well. As far as I could tell they were apolitical.

Regardless… the FBI had them on their radar.

The G-men wanted to know all about my Russian buddies. I explained that they were just businessmen. But the agents said they would be following them. They asked questions about their weekend traveling, how we were paying our Russian associates, even questions about our cash flow from these metal sales.

Most importantly, they wanted to know about…

The Flow of Russian Commodities to the U.S. Market

I attempted to be diplomatic with my responses. I tried to help my government, but I had to protect my business interests. I had no idea where this information might wind up.

I wanted to involve Salomon’s legal counsel, but the FBI agents would have no part of that. They wanted the information from me directly.

They became frustrated with some of my non-answers. They reminded me of my “duty” as a U.S. citizen. The junior agent even tried to intimidate me by reading my social security number from an index card.

It didn’t work. I was used to battling markets all day long. These two paled in comparison.

Why Big Brother Cares About Commodities

I had known for quite some time that intelligence agencies like the FBI, CIA, MI5, KGB and Mossad (to name a few) were very interested in commodity flows.

Many of the traders I worked with through the years had stories about how they had been contacted for information.

Commodity flows are of paramount importance for any intelligence-gathering department. Understanding them underscores the economic strength or weakness of a friendly government or a foe.

This economic intelligence is often used in analyzing current political events and predicting future events around the globe.

Massive sales from stockpiles can signal a foreign government’s need for cash just as a sudden increase in production can point to a new strategic find of a natural resource.

This is important information for all governments. I doubt that the two FBI agents assigned to me really understood the big picture.

To this day, I often wonder if the information they collected was handed to a Big Brother-type G-man who sat in an office putting together the pieces of a massive puzzle.

One thing I know for certain… from where I sat, I knew a hell of a lot more than they did.

The Moral of this FBI Story

Commodity flows can affect the way one country looks at another. They also create effects that trickle down and result in small microeconomic changes that directly impact every one of us… even our investment portfolios.

The sooner you recognize this, the more effective you will be as a trader.

Supply strains in crude oil, for example, affect the consumer directly and the many companies that transport goods and bring those goods to market. A supply problem could put pressure on equities that you may hold. But that problem might also point to an area of opportunity.

Selling off strategic stockpiles of PGMs could increase the cost of making a car in the long run. You’ll feel it in your pocketbook when you buy a new car… and in your portfolio if you own the equity of an automaker.

A good or bad coffee harvest in Colombia or sugar harvest in Brazil could have similar effects.

The point here is if the government is watching commodity flows… as an investor, you cannot afford not to!

The simple flow of physical commodities around the world contains important clues that can explain or predict the future moves of equity, debt or foreign exchange markets. Changes in those flows are magnified in the prices of futures and options.

This is a good time to put commodities on your most wanted list. You might find that this exercise really turbo-charges your personal investment strategy.

Happy Trade Hunting!


Andy Hecht
Editor, Trade Hunter