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.”