Get Out Before It’s Too Late: Commodities Manipulation Revealed
When major banks are able to trade and participate in the commodities market, their influence can lead to prices that don’t reflect true supply and demand fundamentals.
Last week, this conflict of interest has finally come under federal scrutiny.
The Commodity Futures Trading Commission (CFTC) has now taken the first step in an examination of warehouse operations controlled by Goldman Sachs, Glencore Xstrata, the Noble Group and others and used to store vast amounts of aluminum.
The operation is claimed to have inflated the price of aluminum, which has ultimately cost consumers billions of dollars.
For a more in-depth story on this subject, please read the article:
The commission has now told these firms to retain internal documents and e-mails related to the businesses.
This comes on the heels of a recent Senate hearing last Tuesday, entitled “Examining Financial Holding Companies: Should Banks Control Power Plants, Warehouses, and Oil Refineries?”
The panel is expected to focus on how banks have taken advantage of loosened federal regulation to buy warehouses, pipelines, oil tankers and other infrastructure used to store basic goods and deliver them to consumers.
The main question is not whether banks should control the storage and shipment of commodities, but whether such activities could pose a risk to the nation’s financial system.
The answer to that is simple: Yes.
Because the big banks’ controls over commodities give them the ability to affect the prices paid by manufacturers and ultimately consumers. While there is no clear evidence of price manipulation, the recent investigations have already pushed JP Morgan to take action before its too late.
Over the past months, I have talked about the sharp decline of gold from JP Morgan’s vaults. With the recent headlines of big banks’ oligopoly in the commodity warehousing market coming under scrutiny, it seems that was enough for JP Morgan to get rid of its physical commodities business:
Via JP Morgan:
“J.P. Morgan to Explore Strategic Alternatives for its Physical Commodities Business
New York, July 26, 2013 – JPMorgan Chase & Co. (NYSE: JPM) announced today that it has concluded an internal review and is pursuing strategic alternatives for its physical commodities business, including its remaining holdings of commodities assets and its physical trading operations.
To maximize value, the firm will explore a full range of options over time including, but not limited to: a sale, spin off or strategic partnership of its physical commodities business. During the process, the firm will continue to run its physical commodities business as a going concern and fully support ongoing client activities.
J.P. Morgan has built a leading commodities franchise in recent years, achieving a top-ranked revenue position. The business has been consistently named as a top client business in Greenwich Associates’ annual client surveys and was recently named Derivatives House of the Year by Energy Risk magazine.
Following the internal review, J.P. Morgan has also reaffirmed that it will remain fully committed to its traditional banking activities in the commodity markets, including financial derivatives and the vaulting and trading of precious metals. The firm will continue to make markets, provide liquidity and offer advice to global companies and institutions that have, for years, relied on J.P. Morgan’s global risk management expertise.”
It seems JP Morgan wants to get rid of its business while it still can.
It has, after all, been stuck with the legality issues of other banks, after purchasing Bear Stearns’ problems after the crash of 2008.
Maybe this time it can sell their physical commodities business before it gets whacked with more federal investigations.
What to Expect
I would be weary of base metal prices (especially aluminum) in the near-term – especially if the banks begin to unload their physical inventories – but precious metals still look rock solid.
A few weeks ago, I mentioned that the gold market was about to turn. This has now been confirmed by the recent uptrend and strength in the gold market. Gold miners and gold stocks are finally seeing some volume to the upside, which shows promise.
We still have a month of summer left and I believe gold will climb pass $1400/oz. soon. If you believe the same, strong precious metal stocks, including all of those in our Equedia portfolio, could show some short term gains and look to move higher between now and the end of the year.
If gold can reach above $1400 and stay there, many of the better gold stocks will likely not be here much longer – especially not after the summer.