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Forum Post: How do speculators drive up a commodity? ICant find a method or lnk anywhere?

Posted 2 years ago on April 17, 2012, 11:05 p.m. EST by Pequod (17)
This content is user submitted and not an official statement

If you are going to comment on this, please illustrate with examples. Dontj ust say they do it. I know how the Hunts drove up silver, they cornered the market. That doesnt happen with oil, it cant be cornered.

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4 Comments


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[-] 1 points by geo (2638) from Concord, NC 2 years ago

With commodities the price can be controlled without cornering the market. Speculators make money when the prices move either up or down, a static market means no profits.... tie in the herd mentality of smaller investors and you can drive a market up.

The most common way is to prey on fear. Gold is a great example. Gold has very little inherent value. Outside of jewelry and a few industrial applications gold is pretty much a worthless shiny metal.

First the idea that it was a commodity that supports money is used to maximize the sell. People of all income levels believe that when the shit hits the fan and the dollar becomes worthless, that everyone will be using gold for exchange. Nothing could be farther from the truth. When the zombie apocalypse happens, people will be using barter trade and regional currencies will take over. Gold only has appeal to the very rich as a currency, where they will trade it with their very rich friends.

Because we have a fiat currency, and have had one for 40+ years, people who were used to the warm and fuzzy feeling of the gold standard believed that money was more than a medium of exchange and represented capital, therefore they distrusted the fiat currency....(even though they never cashed in a dollar for its equivalent in gold in their lives).

From 1990 to 1996 gold prices were stable at around $350 - 400 /oz. From 1996 - 2000, gold actually dropped to a low of $250/oz. The technology boom was happening and people were making money in other investments.

In 2000, the dot.com bubble burst, in 2001 9/11 happened and we see gold rising to $400 by 2004. Horrible things with only a slight rise in price... hmmm.

But here is an interesting thing... people say that gold rises in a bad economy.... gold keeps on rising during the real estate boom 2004 -2007 ending in 2007 at $600/oz. What brought that on. The answer can partly be found in interest rates. Money became real cheap to get. Investors were going hog wild putting that cheap money into the real estate market, and resultant securities created by that market... but they still had a load of cash to spend.... they started to put it in gold.

The other answer is that in 2004 a change in the gold market occurred. Before 2004 if you bought gold, you were expected to take delivery of the actual metal bars and store them somewhere. Gold is big and heavy. Not an easy thing to do. The change that came was the invention of the ETF. An ETF is a an investment instrument where you buy a piece of paper that says that you own so many oz. of gold, and the mine or investment company does the storing for you. Individuals no longer had to hold heavy gold metal bars anymore, and find ways to keep them safe.

John Paulson, George Soros and Eric Mindich invested heavily in gold ETF's. Smaller investors who shadow the likes of big investors and do whatever the big guys do, hoping to score on their market know how, followed suite bringing the price of gold even higher.

Then a lucky thing happened for the sellers of gold ETF's. The real estate bubble popped, the Stock Market took a big hit, and the banks were in trouble.... a trifecta in fear. Markets love fear. Fear drives the price up of most things that are being threatened, and the scapegoat this time was the dollar. Because of the Fed Reserv's monetary policy to lessen the Great Recession, fear was intentionally spread that the dollar was becoming worthless.... this fear also actually wound up effecting the dollar as well, as there was a rush to put (ironically) dollars into gold ETF's.

Interest rates were still incredibly low, which meant for people who had good credit (rich people like Soros) he had access to lots of easy cash to invest. They continued the run on gold ETF's and the lemmings followed in their footsteps.

By 2008 gold had risen to $1,000 /oz... as the Fed Resv did more QE's more money was pumped into gold. By 2011, it hit $1,800/oz. as little investors continued to head to gold out of fear.

Is gold overpriced? IMO, laughingly so. Watch for this bubble to pop.

Gold pricing chart: 1990 - 2010 http://www.nataliepace.com/newsletters/members/609/gold_20_year_o_usd.png

[-] 1 points by jrhirsch (4714) from Sun City, CA 2 years ago

Ticket scalping is a simple example. They increase demand for the initial sales of tickets by adding an artificial demand, by buying tickets they won't use, so prices are higher for all ticket buyers at the box office. When the event is near, the scalpers sell their tickets for much higher prices due to the desperation of the ticket buyers.

Speculation is making a profit from anothers loss. In this case, the scalper makes the profit from the ticket buyers loss, paying much more than the ticket is worth.

[-] 1 points by Pequod (17) 2 years ago

I think thats a case of cornering the market combined with unusual demand. I know that nowadays lots of concerts have unsold tickets. Airline tickets are very similar.

I dont see how the gold example equates to oil. I do think there is a herd mentailty, investors get stampeded by perceived shortages, but I dont believe small investors buy oil futures. I do believe small investors buy gold. The only peopl buying oil futures are big airlines, big utilities, big shipping companies, big Wall street firms. Those are pretty sharp guys. How are they stampeded?

[-] 1 points by brightonsage (4494) 2 years ago

This isn't the one I was looking for. If I find it I'll be back. http://money.howstuffworks.com/oil-speculation-raise-gas-price.htm

Another one:http://www.policyshop.net/home/2012/4/4/yes-speculation-can-drive-up-oil-prices-heres-how.html

You can cut what is below and paste it into a document that will wrap it for easier reading.

2.5 Trillion Oil Scam — Presentation Transcript

1. The $2,5Trillion global OIL scam
2. In 2000 the Intercontinental Exchange (ICE) was founded It consists of Goldman Sachs, Morgan Stanley, BP, Total, Shell, Deutsche Bank and Societe Generale
3. The ICE is an online commodities and futures marketplace Which operates outside of the US and is free from the constraints of US laws
4. The futures and commodities it trades include: Cocoa Coffee ‘C’ Cotton Sugar No. 11 Coal Conola OIL Emissions ...and of course
5. 80 70 60 Over this year the price 50 of oil has almost doubled 40 Jan 09 May
6. Is it because demand is too great for supply? NO According to the International Energy Agency, worldwide demand is down 2.6 million barrels a day from last year
7. With Saudi production from the Khursaniyah and Khurais oil fields set to increase its output... ...and the Thunder Horse platform in the Gulf of Mexico to start production soon Both of these will contribute another 1.2 million barrels of oil per day to the world market by next year
8. as a result THERE WOULD BE AN EXCESS OF OIL ON THE MARKET so why the high price?
9. The ICE conducts what is know as “ROUND-TRIP” trading of energy These trades occur when one firm sells energy to another and then the second firm simultaneously sells the same amount of energy back to the first company at exactly the same price NO COMMODITY EVER CHANGES HANDS but these transactions send a price signal to the market and they artificially boost revenue for the company
10. DMS Energy, when investigated by Congress, admitted that 80% of its trades in 2001 were “ROUND-TRIP” trades. Duke Energy disclosed that $1.1 billion worth of trades were “ROUND-TRIP” since 1999. Roughly two-thirds of these were done on the ICE Under investigation, a lawyer for JPMorgan Chase admitted the bank engineered a series of “ROUND-TRIP” trades with Enron
11. These extra fees are then passed on to you... THE CONSUMER
12. Every year over $1 Trillion is spent by US consumers because of “ROUND-TRIP” trading of oil or 13% of the incomes of every man, woman and child in the United States of America or 13% more on food and fuel than before the ICE was founded
13. and with 1.7 bn gallons of gas used globally every single day the artificial shortage and speculative demand created by “ROUND-TRIP” trading means that companies could charge you an extra one dollar per gallon of gas that might not seem like much
14. but that one extra dollar would equate to... $50 bn a month for
15. and a $2.5 Trillion global OIL scam by the ICE each year
16. for further reading... <http://seekingalpha.com/article/172797-the-global-oil-scam-50-> times-bigger-than-madoff <http://www.businessweek.com/lifestyle/content/jun2008/> bw20080626_022098_page_2.htm <http://www.businessweek.com/lifestyle/content/apr2008/> bw20080422_520796.htm <http://www.nytimes.com/2009/06/09/business/09gas.html>