Adam K
White
submits:
Aluminium used to be something that made aeroplanes and drinks
cans. Now it is a financial instrument.
Between 75 and 90 per cent of the world's physical aluminium
stocks are tied up in financial arbitrage deals exploiting the
difference between the spot and forward price, according to
several industry insiders. In November Klaus Kleinfeld, chief
executive of Alcoa, described the stocks tied up in financial
deals as "almost all".
Aluminium is the most extreme example of how some industrial
metals are strengthening their role as "hard asset" investments
in the aftermath of the financial crisis. But in the process they
have become less tethered to basic industrial demand, raising
concerns that today's prices are unsustainable and susceptible to
unprecedented volatility.
In aluminium, physical stock levels on the London Metal
Exchange have quadruped in the past 18 months to about 4.5m
tonnes. That amount, enough to build approximately 68,000 Boeing
747s, implies gross oversupply, especially as the pick-up in
manufacturing remains slow in developed economies. Yet prices
keep rising.
(Source: "
Speculation heats up aluminium trade
," William MacNamara, Financial Times, February 17, 2010.)
This is the "Inventory Illusion" in action. Inventories are
swelling around the globe in not just metals but energy as well.
But it is an illusion because those inventories are held by
financial players that are engaged in arbitrage transactions. So
they are not available for sale to physical consumers of the
commodity.
As money pours into passive commodity index investments like the
S&P - Goldman Sachs Commodity Index and the Dow Jones - UBS
Commodity Index (
DJP
), as well as Commodity Exchange Traded Funds (ETFs), they have
pushed up spot prices but they have also pushed the futures curves
into contango. This occurs as other speculators anticipate these
passive longs' need to continuously roll forward their derivatives
positions.
It also occurs in order to give financial players an incentive
to sell the futures to the passive longs. By this process synthetic
hoarding in the futures markets becomes real-world hoarding of
essential commodities. We have a slow-motion cornering of the
markets occurring in most commodities.
See also
Stocks, ETFs Waver as Markets Mark Anniversary
on seekingalpha.com