Friday, January 18, 2013

Modern Commodities Markets are Badly Distorted

Adapted from an earlier posting on Al Fin

Dian Chu suggests that under the modern regime of commodities pricing, very few people know what the true market price of oil -- and other commodities treated as "asset classes" -- is.
The only real market principles are based upon who is using the product, i.e., who needs the commodity to actually take or provide physical delivery. I know what a novel idea, actually using futures contracts the way they were originally intended. But this is something that modern societies must enforce through necessary market reforms. You would find out real quick what the true market price is for many of these necessary commodities by making players take or provide physical delivery. _EconMatters

You might look at modern oil markets as hundred billion dollar casinos, where everybody's a winner -- as long as they control the spin of the wheel.
Prices are not determined by the fundamentals in a manipulated market they are determined by oil being an “Asset Class” which is code word or a euphemism for giant Casino in New York instead of Vegas.

...The price of oil, and as such gas is determined not by supply and demand factors, but by whether Goldman Sachs (NYSE: GS) or Morgan Stanley (NYSE: MS) or J.P. Morgan (NYSE: JPM) puts $400 million on Black or Red, the literal Oil Roulette game of the big banks... If Goldman Sachs puts $400 million on Black prices go up, if they put $400 million on Red prices go down, as simple as that, this is actually how the price of oil is determined, nothing more and nothing less. _Dian Chu
In a simpler world of fewer trades, where commodities futures can be monitored closely by a conscientious overseer, manipulating the market would be more difficult. But in the modern, ultra-high volume speed-of-light trading by the giant banks with minimal oversight, the smart money bets on the smart manipulators.
...lets just abolish the SEC and the CFTC, as they are completely useless. Furthermore, since all markets are ripe with manipulation, essentially the wild-west; why not reduce government costs by cutting funds to these two agencies entirely. They serve no real purpose when markets are corrupted everyday with Fake Orders, Dark Trading Pools, High Frequency Trading Algos, and the like except to further government costs & bureaucracy while strictly providing the illusion of fair markets. These organizations are a complete joke, and have been for decades!

... _Dian Chu

If you combine Dian Chu's reasoning above with Andrew McKillop's thinking featured in this Al Fin Energy article, you may begin to see a pattern developing.

Even in an era of relative oil oversupply, markets can be tweaked so as to bring oil prices further upward -- until it is time to let them drop again.

It is difficult to deny that global oil markets have become the equivalent of casinos, with all the big players standing around the wheel, placing bets and exerting small bits of control over the ball, here and there, now and again, over and over again.

As for US government oversight, fuggidduhbowdit! The Chicago outfit only wants to make sure that it gets its piece of the action.

More from Dian Chu here:

Physical-delivery-needed-in-agriculture & Energy Markets

But don't hold your breath waiting for any meaningful reforms that might make these markets more transparent and less manipulable. The big players will always give themselves the upper hand if at all possible.

There are many indicators suggesting that big governments and large intergovernmental agencies are happiest when managing a world where information and data transparency is limited to persons or entities on the top, politically and economically.

This has generally been the case in Asia and Europe (and for the UN, World Bank, and IMF), and is becoming increasingly the case in the US under the Obama administration, also known as the Goldman Sachs administration.

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Blogger Benjamin Cole said...

Very interesting post.

I suspect commodities markets have been gamed; and may be gamed by sovereign powers.

Think Russia.

5:41 AM  

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