Hedgers are to blame for rises in commodities.

It is always easiest to blame something you do not understand.  My job as a speculator is to provide price discovery/liquidity/hedging.  I get an opportunity, the key word is opportunity, to make money for providing this service.  I am not different than any other business.

What is a future?

A future is a contract between a buyer and seller of certain quantity, price, and quality.  A buyer agrees to pay todays price in the future and the seller agrees to delivers good and be paid that price. There are two types of futures products.

Physical  vs cash settled futures

Upon the expiration of contract a physically delivered future, money and goods are exchanged.  When a cash settled future expires, money is exchanged depending on who was right about the direction.

Market mechanics

Prices rise when there is less selling density than buying density.  Prices decrease when there is less buying density than selling density.  Futures are a zero sum game in that for every dollar lost there is another gained. But not all dollars are created equal.  When a speculator losses a dollar it is gone. When a hedger losses a dollar they are paid in protection/price discovery, if they are really hedging.

What a speculator wants.

To make as little noise as possible.  They never want to get too big that they can’t get out.  They help to keep other speculators in their place by ensuring things do not get too out of whack in the short term. (This works best in liquid markets).

Role of a speculator vs hedger.

A speculator job is to make the hedger/investor pay a different price.  We are agnostic on direction, we want volatility.  Volatility occurs when there is uncertainty or a lack of buyer and sellers.  A hedger has an accumulative effect on the market and intend to use the product.

Impact of speculator and investor on the market.

The reason a speculator cannot effect the price long term is by their nature they have a net zero effect.  If I am long and I sell a futures contract I become part of the selling density to get flat.  My impact disappears because for every buyer there must be a seller.  A speculator is almost never going to take “delivery”. There are is a huge cost to taking physical delivery.

Why you should not blame a speculator or hedger.

Both are taking a risk, there is nothing to say that the price will continue going in their direction.  The difference between a speculator and investor is what they want.  A speculator is trying to take advantage of short term inefficiencies and making the longer term players pay a different price. Notice I did not say higher or lower price.  A hedger is trying to take advantage of the big picture but more than likely just reacting to a government policy and to lock in a price.

The rise in prices was telegraphed.

The government pumping money into markets all but guaranteed the increase in price of everything.  The timing of the increases is always different but the effect never is.  The first person up the hill always gets the arrows and is paid for such bravery.  Many die trying to be first.

Necessary evils

I am not saying QE was right or wrong I think it is too hard to tell right now. Something had to be done. However, it is my opinion is that we need to stop hedging physically delivered futures across other instruments.  We know how derivatives on derivatives worked last time.

Is Obama trying to shake down “speculators”

There is an interesting story out by Followthemoney.org about Iowa District Attorney Tom Miller increase in donations after announcing that he, along with 50 other DA were going after banks for illegal foreclosures. I am not sure why they choose this particular AG except that Iowa is usually an important state in elections . What happened in the case of the other AG’s? I don’t know the whole story.

Obama has begun fundraising and wants to raise a billion dollars. I doubt there is as much support from those $25 donations. His fault or not the economy is jacked, all prices are up, and just an overall inability to make a decision has left many unhappy. I have heard rumors that some of the big time donors in Chicago are fed up. (Don’t quote me as I probably heard it from an anti-Obamian.)

There are several stories out there about the AG’s and Obama speculator but no one else seemed to make the leap I did it could be because I am wrong.  More than likely is is because no one wants to speak up for the evil speculator.

If Obama wants to lower gas prices and win votes, get rid of taxes on gas and release some of our strategic reserves.  There are many ways to help with gas/oil prices but one thing is for sure, blaming speculators is not one of them.

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The services and materials provided should not to be interpreted as investment advice, an endorsement of any security, commodity, future, or personal investment advice, or an offer to buy, sell, hold or trade futures, options or commodity interests or a recommendation to buy, sell, hold or trade futures, options or commodity interests. You assume the entire cost and risk of investing and are solely responsible for any and all gains and losses, financial, emotional, or otherwise, experienced, suffered, or incurred by you.

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