Metals markets, including aluminum and gold, are the most affected by speculation among commodities, according to Deutsche Bank AG. (DBK)
Almost three-quarters of aluminum stockpiles monitored by the London Metal Exchange are locked in so-called financing transactions and unavailable to consumers, said Michael Lewis, head of commodities research at Deutsche Bank. Stockpiles exceeded 5 million metric tons for the first time in January. Investor holdings of gold in physically-backed exchange-traded products are also distorting the market, he said.
“The focus has always been on food and energy, because these are commodities that affect consumers on the day-to-day basis,” Lewis said at a conference in Bloomberg’s London office today. “But the speculative activity and the price distortion is probably more relevant for the metals markets.”
The U.S. Commodity Futures Trading Commission is seeking to cap the number of derivatives contracts a single firm can hold in the markets. Commodities speculation has been the focus of numerous congressional hearings since 2008, when oil reached a record $147.27 a barrel in New York. Research sponsored by the United Nations, International Monetary Fund and other global organizations suggest speculation in crop futures by index funds and large banks may cause price spikes that can put grocery costs out of reach for poorer people.
Last year, net-long positions in U.S. crude held by hedge funds and other money managers surged between mid-February and early March, as prices climbed towards their 2011 peak of $114.83.
Aluminum stockpiles monitored by the LME rose to a record 5.13 million tons last month. Buyers in Europe are paying a premium of $200 a ton for metal for immediate delivery, up from $157.50 on Jan. 6, data from Metal Bulletin show. The U.S. Midwest premium is at 8.35 cents per pound, up from 7.75 cents on Jan. 6, the data show.
“What may look like an over-supplied market is actually quite tight as a result of this financial activity,” said London-based Lewis. “This market is being distorted by the investor and financial community.”
A financing transaction involves a simultaneous purchase of metal for nearby delivery and a forward sale to take advantage of a market in contango, when contracts with later delivery dates trade at higher prices than nearer-dated metal. Financing costs and expenses for storing metal influence profits on the transactions.
Investor demand for gold gained as jewelry usage declined, Lewis said. Holdings (.GLDTONS) in physically-backed ETPs rose to a record 2,403.242 tons yesterday, according to data tracked by Bloomberg. Investment accounted for 40 percent of gold demand last year, according to the World Gold Council.
“With the gold physically-backed ETFs, investors are taking ownership of physical metal, and storing it, and slightly distorting the market,” Lewis said. “This may be one of the reasons for gold’s ability to rise when the dollar is falling and when it’s rising, and the interest in gold as an inflation protection, and as a deflation protection.”
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