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Forced Commodity Long-term Investment liquidations Coming?

Commodities / Government Intervention Jun 12, 2008 - 05:37 AM GMT

By: Christopher_Laird

Commodities

Best Financial Markets Analysis ArticleThe CFTC is looking at changing commodity rules to force big funds to disgorge multi thousand contracts positions.

The CFTC stated the commodity markets are not geared to have big funds sitting on long term positions of thousands of commodity contracts for long periods for foods and so on.


We could be looking at a forced liquidation – similar to the silver liquidation that happened in the big metal run up and silver corner by the Hunt brothers. That episode resulted in huge losses for the Hunts – who were forced out at huge losses after they tried to corner the silver market.

The entire world is up in arms about the energy and food shortages. It does not matter that the shortages are the real culprits. The fact is, pretty much all the nations are getting ready to force speculators out of these markets. The speculators are buying thousands of contracts in futures markets, even years ahead in grains, and sitting on them.

The fact is that, in a world food crisis, this is going to force poor people to pay – tribute – to big investors to eat. The world governments are not going to allow that to happen if they can stop it.
Already, India and others, and the US CFTC are looking at ways to force speculators to disgorge their tens of thousands of contracts in critical commodities.

I would bet that the fund universe is going to lose this battle. Many nations are getting behind this effort… here is an article talking about the disgorge effort: “by Peter Shinn

The government could step in if commodity prices keep shooting higher. And some see some sort of government intervention in the marketplace as a virtual certainty. But for the leader of one agricultural group, that kind of discussion brings to mind the ag trade policy missteps of the late 1970s.

Imagine $200 a barrel oil, $9 a bushel corn and $20 a bushel soybeans. Then consider the prospect of less available wheat than now thought as the cattle industry begins feeding much more of that commodity. That's the near future as envisioned by two separate commodity analysts and brokers, especially in light of Tuesday's USDA Crop Production report and World Agricultural Supply and Demand Estimates, which lowered this year's U.S. corn production by 360 million bushels to 11.7 billion and projected increased global demand for soybean meal and vegetable oil. 

And if that future does come to pass, both of the analysts foresee U.S. government intervention as likely. Doug McClellan is President of Plains Commodities in Omaha. He told Brownfield he's heard talk of a complete elimination of government support for corn-based ethanol and a potential effort to drive excessive speculation from ag commodity futures markets.

"One way to do it is let's just go in and cut the ethanol program completely," McClellan said. "Let's go in and take the hedge funds and the index funds and say, 'No, you can't have 5,000 or 10,000 contracts per account or whatever it is. We're going to cut that speculative power back. You can only trade 2,500 contracts and force a liquidation to get that speculation back in line,'" he added. "Those are some of the scenarios going around."…” http://www.brownfieldnetwork.com/

But, in light of this very painful commodity boom, the USD happens to be rallying at the moment. Of course, one reason is that the US Fed (Bernanke) is talking about fighting inflation. In fact, much of the world is talking that. That also is happening at the right time to combat this commodity investment ‘boom' that is probably going to be curtailed by world regulators.

The USD rallied heavily this week on the perception that the Fed is really going to try and do something about inflation in the US. All the markets needed was an excuse to rally the USD because there is already so much pressure in the EU zone to stem the Euro's rise. Gold took quite a hit this week as a result. I would not be surprised that the world commodity investment mania is behind the USD rallying because a higher USD is a way to combat that.

We had alerted subscribers Sunday that the USD might strengthen Tuesday, and gold correct. That happened. Oil has been resisting correction somewhat, however.

By Christopher Laird
PrudentSquirrel.com

Copyright © 2008 Christopher Laird

Chris Laird has been an Oracle systems engineer, database administrator, and math teacher. He has a BS in mathematics from UCLA and is a certified Oracle database administrator. He has been an avid follower of financial news since childhood. His father is Jere Laird, former business editor of KNX news AM 1070, Los Angeles (ret). He has grown up immersed in financial news. His Grandmother was Alice Widener, publisher of USA magazine in the 60's to 80's, a newsletter that covered many of the topics you find today at the preeminent gold sites. Chris is the publisher of the Prudent Squirrel newsletter, an economic and gold commentary.

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