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29 October 2014

Manipulations, Corners and Crashes


This morning, I read the obituary of Nelson Bunker Hunt. (London papers are clearly a little behind the times, since he actually died a week ago.) When I mentioned this to some of my younger colleagues, I was greeted with blank stares, and “who’s he?” With apologies to older readers, I’ll just first briefly remind (or inform) why this Texan oilman has a particular place in the memories of a generation of metal traders. In the wake of the Great Depression sparked by the Wall Street Crash of 1929, the US Government (for a variety of reasons that we don’t need to go into here) outlawed most private ownership of gold; that ban lasted until well after the Second World War, and as a pretty direct result of it, silver was the precious metal of choice for investors and speculators.

Own the Market, Earn a Fortune...

Nelson Bunker Hunt and his brother Herbert (another brother, incidentally, was Lamar, who set up the WCT tennis tour) hit on the not totally original idea that if you could buy and own all of the world’s stock of a commodity, then you could dictate the price of it and earn yourself a fortune. So they started buying silver, both physically and on Comex, then the major futures market contract, until by early 1980 they had pushed the price from something like $6 to virtually $50 and controlled over a third (it is estimated) of the free (non-government held) silver in the world. But things never go entirely as planned, and as it began to look as if their corner might just succeed, the US authorities, in cahoots with the Comex board, brought in some rule changes that reduced the permissible leverage in futures trading. The resultant margin calls caused the price to collapse, losing over fifty percent in four days and continuing on down. The Hunts were unable to pay their margin call, and they lost over a billion dollars (although that was by no means the extent of the family fortune). Silver has never been up at those prices again.

Apart from marking the death of a man whose name still resonates with traders who were active at the time, why bring this old story up again today? Well, there’s been something else reported in recent days, which which kind of chimes with it. The LME stock reports have indicated a large copper position for some time now, and various newspapers and press agencies are alleging that the holder of that position is a very well-known (to those in the business) hedge fund, attempting a market squeeze. I have no idea if those allegations are true or not, but it is just another reminder that people still want to play one of the oldest games in the commodities markets - owning as much as you can so that you can become the determining factor in price setting. 

Last week, I met the Chairman (and owner) of a large industrial group, based in a far eastern country, that is a large consumer of nickel. He made the same suggestion - buy all the nickel there is, and that way get to be the arbiter of the price. When I pointed out that at current prices and current LME stock levels that probably represented something approaching seven billion dollars, he seemed unfazed; I suppose with enough leverage, everything is possible.

But Does it Work?

What’s intriguing about all this, though, is that the history of this particular game is not hugely encouraging to those that want to play it. Apart from the Hunt brothers, think of the International Tin Council, or Mr Hamanaka and the Sumitomo Corporation. OK, so the ITC had possibly a slightly different motivation, but the tactic was the same; control the price by owning the market. (Whether the hedge fund standing accused in the press currently has any such lofty intentions is of course an issue that we can’t know; the evil may simply be in the eye of the beholder.) So given that history largely tells us that such corners or market squeezes are on balance not likely to succeed in anything other than the short term, in order to set off on that course, you must believe that you are better than your predecessors in at least two essential respects. First, you must have better supply information - the elasticity of supply of the metals when prices are pushed is remarkable. Visible stock is usually the tip of a very large iceberg. Secondly, and most importantly, you’ve got to believe that you, better than all those who went before, and better than Secretan, better than the Hunt brothers, better than Hamanaka, will be able to judge the moment to get out before you become overstretched. And always remember that when the dominant position holder starts liquidating, the rest of the world pretty soon finds out about it.

Look at History

It all sounds a great idea on paper, but you’re on the wrong side of history if you really expect to succeed. People keep on trying, though. Triumph of optimism over the realities spoken by history?


On a totally different note, for readers in London, if you haven’t yet been down to the Tower to look at the poppy-filled moat, do it now. The ‘Blood Swept Lands and Seas of Red’ installation by Paul Cummins is stunning, and genuinely moving; it will be the iconic memory of the hundredth anniversary of the outbreak of the First World War. The last poppies will be planted on 11th November, after which the piece will be dismantled; it’s seriously well worth the short walk down there.


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