Big Banks playing dirty in the metals market

FWIW there is a fair amount of speculation in your post.

President Clinton was also behind Rich's pardon, and there was talk that Rich donated lots of cheddar to his campaign.

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How much confidence should we have in anything an author writes when he doesn't know the difference between "there" and "their"?

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Good job not addressing the point of the post.

The banks owning the LME, physical metals, warehouses, and delayed shipping periods 400-500% from previous warehouse owners is fact.

Maybe they delayed shipping because they are incompetent? But no reasonable person could come to that conclusion.

Okay.

I screw up there and their on a regular basis, especially when using iPhone.

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The there/their was in the OP's description of the article. Matt Taibbi's writing style isn't for everyone, but he certainly doesn't publish anything with basic grammar and spelling errors.

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Oh, okay. I read the quote in the OP in this thread and thought it was quoted from the original news article not from what was written by a poster on the Poli Board.

In that case, LET'S KILL THOSE F*CKING BANKERS!!!!

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His point is now banks are becoming involved in other markets in a similar manner. He also points out that much of the push in the metals market was taking place as the banks were taking place as the banks were receiving bailouts.

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In all fairness to the banks, they'd been pushing to get into the physical commodities markets for years before the financial crisis. I get the bailout argument, and I don't like supporting Goldman because they are pretty dirty traders. It's just a weird area and point of time that if you're a newspaper article author you have the luxury of being critical while the regulators of the time had the onus of keeping the financial system from going under.

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Some stuff I would call settled fact, some stuff I would call reasonable speculation, and some stuff is pretty far out there

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Agreed on all cases. I just think something is horribly screwed up when banks are taking bail outs with public money on one hand and then speculating (which is bad enough) and manipulating commodity markets on the other hand. They are screwing the same public that is bailing them out by driving up prices of various goods in a dubious manner.

Just to be perfectly clear I see nothing wrong with speculating the in commodity market. I've traded gold, oil, wheat, corn, platinum, and others myself. Speculating when backed by the US government and its taxpayers is pretty bogus IMO.

If the article is too complicated I'll try to simplify what's going on with a lot of their own words:

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There’s a glut of supply, which creates a contango forward structure (contango means that future price is higher than the spot price). Producers, who would otherwise be tempted to cut supply and suffer income loss, are encouraged by banks to keep producing on the basis that they can use their inventory as collateral for secured financing.

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The encumbered collateral (inventory)is kept off market — (much like ECB periphery bonds) — and hedged which derivatives, which due to the contango structure, end up yielding a positive return for banks.

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You could call it balance sheet rental to producers and traders for the sake of funding inventory (and/or contango positions in their own right) to take advantage of the mispricing of the curve. After all, the reason banks are able to make these deals profitable is because they bridge the difference between the physical reality and financial investors’ (especially passive ones) overpriced expectations of where commodity prices will be in the future.

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Hence why I say this isn't speculation, they are just essentially short contango which results in a positive roll yield (they sell higher future commodities prices and buy when they are lower at spot, there is a little convolution in that explanation but the concept is true). However, there are problems with this which they note here:

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The problem is that the off market collateralisation only creates information asymmetry across the market, making it impossible for traders to gauge the true clearing price based on physical supply and demand fundamentals.
In the aluminium market it’s also gone to the other extreme by pushing up premiums for physical spot supply, while adding to volatility more widely — since the trade now responds not only to contango, but to the opposite scenario which is backwardation. Thus when the market backwardates, traders release off-market supply (non-LME) to take advantage of physical premiums. When it goes back to contango, they simply flip back to storage mode. And we are told it only takes as much as a label switch on the inventory within the warehouse to exploit the market changes efficiently

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The key is information asymmetry which makes the true supply/demand transparency almost impossible for anybody trading the commodity.