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Metals Market Manipulation - What Big Banks Are Hiding from You Now

Commodities / Metals & Mining Dec 31, 2013 - 11:36 AM GMT

By: Money_Morning


Remember the outrage last July when we found out owners of giant metal storage warehouses, folks like Goldman Sachs and JPMorgan Chase, were delaying delivery of stocks of aluminum so that they could collect more rent on them?

We learned that, since Goldman took over some industrial warehouses in Detroit, the delivery time for aluminum went from six weeks to 16 months.

That got a lot of people mad because, in case you can’t add two and two, raising metal storage costs increases the prices producers who use the stuff pay for it. And of course, they pass those price increases along to consumers.

The CFTC began an investigation. The Justice Department is looking into it too. But not wanting to wait, the London Metal Exchange (LME) acted right away.

The LME is the world’s largest metal exchange. And they oversee the 778 privately owned warehouses (75% of which are owned by just five companies) that stockpile metals traded on the LME. So they got a lot of bad publicity from the fiasco. The LME threatened warehouse owners with a slap in the face if they don’t cut back delayed delivery times to only 50 days, starting April 1, 2014.

Too bad they were a day late and a few million tonnes of metal balls short.

The warehouse owners, it turns out, were already fixing the problem themselves – and have been for three years. Not because they were hell bent on getting ahead of LME rule changes and applying a market solution to a regulatory problem…

But because there’s more money in smarter manipulation.

Since 2010, warehouse owners have been building huge warehouses that aren’t governed by LME rules. According to a Wall Street Journal article from Friday, they’re storing hundreds of millions of tons of metals – like aluminum, copper, nickel, and zinc – in these “shadow warehouses,” as opposed to in LME-sanctioned warehouses.

Let’s use aluminum as an example. Analysts estimate that while there’s about 5.5 million tons of aluminum in authorized, LME-approved warehouses, there’s even more in shadow warehouses – probably between seven and 10 million tons.

Now, here’s the part where I tell you why they’re really doing this, so you don’t get fooled by what you read anywhere else.

Some analysts will postulate that storing millions of tons of metals in “off-exchange” shadow warehouses – while the world looks to spot and future prices posted at the LME as indicative of “real world” prices – will cause price collapses if huge stockpiles of warehoused metals flood the market.

Oh the fear of deflation! I’m shivering in my boots.

Don’t worry. The chance of that happening is exactly between slim and none.

It doesn’t mean metals prices won’t go down. They sure could. It means don’t expect them to go down and stay down, because that ain’t gonna happen unless we get another 2008 meltdown.

Here’s the real reason shadow warehouses are stockpiling metals…

By keeping the true levels of stockpiles from the public metals miners, financiers of metal stockpiles and warehouse owners (of course I’m talking about some giant banks and behemoth metals mining and trading corporations, like Glencore Xstrata Plc., that run this monster game) can profit from information others don’t have.

By casting stockpiles into the shadows and reducing transparency, manipulators can increase volatility, which of course is the essence of trading profitability.

How? Two ways.

First of all, if metals are taken out of the market, removed from the numbers that are counted that determine prices in a supposedly free market price discovery exchange, prices will go up. Now, if you own warehouses full of the stuff, that’s a good thing, right?

Second, there’s a futures market. That’s what they trade at the LME, futures on these metals. If the price of metals is expected to rise, futures prices for those metals will rise too. (This part gets a little technical, but hang in there with me. The payoff is big.)

When you go out on a “term basis” (in time) in the futures market and prices of further and further out delivery months are progressively higher and higher the more distant the futures expiration date, that’s called “contango.”

Metals futures prices are in contango for this reason. If you bought metals today that you needed to store, and you had the option of not buying and storing the metal today but buying the same amount via a futures contract for delivery to you in six months, the person selling you the futures contract might be the owner of the metal today, and he’s being charged for storage. So he will charge you a higher price for the futures contract to make things even. That’s part of what causes contango.

Now think about that.

If I own metals, and I store them in shadow warehouses, and the true amount of that metal in all warehouses isn’t known, but it’s believed to be less than there is (because I’m hiding mine), the price today will be higher. And since I’m charging a lot to other metals stockpilers in my LME warehouses and delaying delivery to collect more rent, which also raises the price of the metal today and therefore raises the futures prices across all delivery months, with the further out being more expensive… guess what. I can sell (short) long-dated futures contracts that I’ve artificially helped manipulate higher to finance my storage of the same metals in all my warehouses. That reduces my cost and increases my profit.

By manipulating stockpiles, smart operators can make money lots of ways.

Another way is by trading the volatility they create in the pricing structure. After all, they are manipulating the prices. If they want to dump stockpiles and trounce prices, don’t you think they’ll short the overpriced futures to profit from falling prices they force down? If you short enough, so what if the price of what you have stockpiled goes down? You will make more on your futures short if you’re a smart cookie. And these guys are smart.

And then they will buy more physical stock and futures at the bottom of the panic-selloff and profit from the price rise too.

What we have here is the freely manipulated market owned by giant banks and corporations freely manipulating everything they can because of their massive size and because they own the means of production, storage, pricing, and the officers of the armies that protect their wealth.

Welcome to the big bank- and mega corporation-owned banana republic of Earth.


Source :

Money Morning/The Money Map Report

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