Perry Glasser

Posts Tagged ‘Silver’

COMMODITIES – THE SHORT COURSE

In Business, Economics, Economy, EDUCATION, Finance, Politics, Wall Street on August 17, 2011 at 12:23 pm

The Yokel Party - A Moral America for Hogs

Dollar$ is betting on Governor Perry to win the candidacy of the Yokel Party, those stern citizens whose understanding of the human heart endorses warfare against short, swarthy non-Christian goatherds abroad and here at home abhors government interference with our private lives, the exceptions being conduct by God-cursed Sodomites in their a bedrooms or any woman’s control of her reproductive organs.

Perry will no doubt insert his foot in his mouth as he did this week by accusing the Chief Wizard Bernanke at the Fed of “near treason” if he adjusts monetary policy by printing more money. Dollar$ can only stare and gape.

While we wait for how that will play out, Dollar$ takes the opportunity to educate, safe in his knowledge that the Texas textbook folks would never allow anything approaching accuracy and clarity to befuddle the children of The Lonestar State. In Texas, history and fiction are synonyms, a situations that permits school boards to consolidate English and History classes, thus saving millions for far more important matters, cheerleading and Friday night high school football.

DIRT

Commodities come out of the ground. Copper, iron, oil, and gold, are metals used to make other stuff. Making other stuff adds value, and how complicated and valued that making can be determines value. Telephone circuits, and roof flashing are made of copper, ideal for its purposes because copper doesn’t oxidize much. No rust, no replacement costs. Steel is made from iron. Gasoline, diesel fuel and kerosene are made from crude oil. Jewelry and state capital domes are made from gold.

American Commodity

Some commodities are renewable and are grown from the ground; lumber, oranges, marijuana, and corn, for examples, and by very small extension, hog bellies and beef. The reason burgers at McDonald’s are cheap, but steak at Morton’s is expensive, is the value we place on the making of the meal.

Generally, the price of commodities are purely set by supply and demand. If there is a frost in Florida, expect the price of orange juice to rise. The world will not run out of oil any time soon; but what will happen is that oil difficult to extract from remote places in the earth without great expense will become economically attractive because shortages will send the price up.

The price of commodities varies almost purely by supply and demand. When there is a lot of weed on the street, a joint is cheap. Same is true for hog bellies and fructose.

When supply increases, prices go down.

When demand rises, prices rise.

Corn is getting expensive, for example, doubling in a year, because the demand for sweet drinks in the growing consumer culture of China is large, not to mention the growing demand pork dinners in Shanghai and Bejing—those hogs have to be fed corn. In the West, Weasels have deemed the introduction of grain alcohol into gasoline. They are rejoicing in Des Moines, or, and Dollar$ apologizes for this one, they are living high on the hog.

MARKETS

The people in industries that use gold and lumber and oranges and fuel and corn syrup all face the same problem. They rely on a steady inflow of commodities, but cannot rely on a steady price. Hurricanes in the Gulf of Mexico frosts in Florida, hailstorms in Kansas will send the prices of oil, orange juice and wheat spiking or plummeting in an instant.

Well-meaning Wizards invented Futures, a speculative investment that guaranteed a delivery of a quantity of commodity at a future date at a specified price. Sellers were guaranteed a specific price; buyers were guaranteed a specific price. Risk was reduced all around.

EVIL WIZARDS

Commodities Speculator

But there is a secondary market in those commodity futures. That’s not a bad thing: suppose you are Juggernaut Airlines and have stocked up on airline fuel futures just before President Shrub goes in pursuit of non-existent Weapons of Mass Destruction in an oil rich country. As CEO of Juggernaut, you make more money selling your futures at a profit to competing airlines than you would by taking delivery and flying airplanes, or you sell a lot of very inexpensive seats while your competitors have to charge more.

If you doubt this scenario, check the history of Southwest Airlines.

This is just good business, and Dollar$ wishes more businesses were clever enough to make more by charging consumers less.

Where Weasels, Buccaneers, and Wizards fail Citizens is by not regulating speculators, Buccaneer traders of the underlying commodity by rumor and financial maneuvering trade those highly leveraged future contracts. They have no intention of ever taking delivery. Famously, the Hunt brothers tried to corner the world market on silver, at one time controlled 50% of the world supply, and when the bubble burst nearly succeeded in bankrupting Peru. Those of us who paid $4.00 pr gallon of gas a year ago when oil itself was plentiful know the feel of a speculative squeeze.

Most of this trading takes place in Chicago at the Mercantile Exchange.

POLICY

The problem is not that people make money.

The problem is not that people make a lot of money.

Dollar$ suggests that speculation can be controlled by requiring that all traders in future contracts be required to show the capacity to take delivery of the underlying commodity.

If you aren’t a cruise line or airline, what the hell do you expect to do with 5 million gallons of fuel other than drive up the price?

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