The War On Commodities

Yesterday a not totally surprising event took place, it's one that commodity traders have feared, the CME raised margin requirements on Crude/Brent oil by a quite sharp 25%. They also hiked some FX margins and a lot of other petrochemicals such as propane, butane, iso-butane, natural gas, bio-deisel, e-mini gasoline futures, e-mini heating oil futures, naphtha, as well as many others and all kinds of derivative contracts in associated trading of the above. So as you can see, it wasn't a pure hike in oil only. Again, this has been a fear suspected by commodity traders once Comex went down the silver hike road.

This appears to be a blatant organized move to hit all types of commodities, one after another. Remember last week were were seeing broad weakness across the entire commodity sector. It seems many specialized funds were caught off-guard and sustained massive losses. This appears to be the strategy, create uncertainty about the commodity you may be trading whether there's been a hike or not, you simply don't know (as a fund manager) when the next hike will hit your portfolio and how many hikes will follow in rapid succession.

Once again, I believe this is centrally planned, the Obama administration has made no secret that they were going after "speculators". These broad hikes seem like an attempt by Bernanke to wiggle himself free of the Chinese Finger Trap he created. It also seems they've found a new policy tool in the exchanges and even brokerages.

When asked by a silver trader yesterday whether I believe the SLV low around $33.60 would hold, I said that PSLV (as I've been following PSLV more closely then SLV lately) is in the middle of a cycle up, it's underwent the accumulation phase, it's well into the mark-up phase and I believe they will hasten the distribution phase and try to get out of the current cycle quickly. Thus my opinion is that there is mass uncertainty on Wall Street as hard is that is to believe, but to tip off Wall Street would allow these funds to position accordingly and avoid massive losses. It would seem massive losses among several funds would make commodity based funds re-evaluate their spec positions and whether they believe they can ride them out without losing their fund or a big portion of it. For most decent funds, risk management is the first rule and uncertainty is the enemy. The Fed/US government, or whatever combination of powers that be are behind these margin hikes can do a lot more with a lot less if they introduce uncertainty.

The question of whether or not there's a bubble in silver would depend on whether you believe gold's price is in a bubble. By historic and geologic measures, silver, while it was frothy over the last month, is still way below the historic value as compared to gold. The other thing to consider is the extent of a bubble, maybe gold is in a bubble, however I believed and still believe housing was in a bubble as early as 2003, that bubble lasted several more years. Bubbles almost always are extreme so while silver was certainly frothy, I don't think I would characterize it as a bubble.

Thus far today, as in AH trading last night, oil has taken the hike in stride. If there's a warning being sent out, then perhaps t follow the silver example in which the initial hike was about 9% if I remember correctly, then another hike a few days later, a few percent higher, and another higher, and another even higher. There may be a message being sent and silver was the example. These funds are like supertankers and can't just sell their position in a single trade and walk away like most of us. So if they take the silver example and take it seriously, then they should probably  start unwinding their spec positions in commodities or at least the CME hiked ones, today if they want to avoid the fate of several other large funds.  We'll be watching the underlying action across the commodity and FX complex and see if there's any real movement, it should be fairly obvious.

However, let it also be said that the Fed may very well be helping the banks by not using official policy to halt the commodity run, but this will effect the banks and their nearly perfect record of profits. I mentioned that if you take away the banks trading operations, their results don't look very god. We received confirmation yesterday that the biggest creditor to the American public BY FAR, is the US Government, a traditional bank profit role. This means the banks have not returned to their normal business model and instead have found their own way to make profits. The Fed may be killing a few birds with one stone if they are indeed behind these margin hikes.