Blame the Fed for commodity speculation

Bruce Krasting's picture

The President of the United States has hit commodity investors. Several
Senators, the Attorney General, the CFTC and most of the other global
exchanges have joined in. I think they are all pointing fingers in the
wrong direction. It's the Federal Reserve that is behind all the
speculation of late. Let me throw out some raw numbers to make a point:

(I) Copper futures on the CME have seen average volume of 50,000
contracts a day this year. Each contract is for 25,000 pounds. Therefore
the average turnover of copper at just the CME is 570,00 tonnes. The
annual global consumption is 20mm tones so Copper futures at the CME
(alone) are equal to 5.7Xs total world consumption (200 day trading

(II) CME corn futures trade at a rate that is 10Xs global consumption of 861 million tones.

(III) CME wheat turns over 5Xs global consumption.

(IV) NYMEX Crude volume is equal to trade at 5Xs total global consumption of 32 billion barrels barrels.

me emphasize that these are all global commodities. There are active
exchanges in many other financial centers. There are also private
transactions. Finally, there are over-the-counter derivatives and ETFs
for all of these commodities. The average traded volume in the US
futures market(s) is an average multiple of 5-8Xs of global consumption.
The total world financial turnover is at least twice and possibly 3Xs
that which is evident from US futures data. (For example consider crude
and London ICE trading. Recent volume in crude trading at ICE is by
itself an additional 6X’s global consumption.) What this means is that a
barrel of oil is traded back and forth (mostly on paper) 15-20 times
before it is consumed. The sum of the global financial ins and outs for
just crude would be ~$60 Trillion.

The fact that commodities are traded 10-20 times their consumption is
confirmed (to me) when looking at FX global volumes. The CLS data
(interbank trading only, no futures or derivatives) shows that FX
trading is $4 T a day. That comes to $800T per year or about 13Xs total
global GDP of $62T.

Does this make sense to you? Is it necessary? Is it desirable? Is it
controllable? What’s causing it? I’ll try to answer these important

* No, it doesn't make sense. These numbers are far higher than
the historical norm. Consider this chart that shows long-term NYMEX
crude trading volume. Volume is up 200-300% versus what was happening in

* No, it's not necessary.
The volume that a commodity is traded is directly correlated to the
uncertainty of the price dynamics of the underlying commodity. The
higher the uncertainty the greater the volume. There is a
great deal of uncertainty today regarding the future path of commodity
prices, but there has always been uncertainty (and volatility) so I am
not convinced that the sharp increase in the volume of trading is
justified based exclusively on risk factors.

* No, it is not desirable. We have seen in just the past few
months how crude prices have performed. They raced higher, and then they
collapsed. In my opinion a great deal of the volatility was related to
increased trading and not to real changes in the underlying dynamics of
supply and demand. Higher volatility in prices results in (net) higher
prices to end-users. Consumers are paying a pretty penny for the
resulting added on risk-premium.

* Finally we come to the critical question of what's causing this?
I maintain that the increased trading and the resulting volatility in
key global commodities is the Federal Reserve. Zero interest rates (and
QE) have eliminated the cost of owning commodities to near zero. Not
only is their no financial penalty (interest expense) to finance a
physical position there is a financial incentive to participate in the
commodity market. When interest rates are zero, money will seek out a
higher return. This reality is the basis of current Fed policy. The
Fed wants people to take money from their checking and money market fund
and put it to a more useful purpose.
The Fed is happy when that “useful purpose” is to buy stocks or junk bonds. The Fed and the rest of world should not be surprise that another “useful purpose” is hard assets like commodities.

Consider this review of longer-term volume in the futures markets. They all show a big jump in volume around 2008. That is ZIRP at work:

The President can yell all he wants. He can sick the Attorney General on
the players. The CFTC (and all the other exchanges) can play around
with margin rules all they like. Those Senators making a fuss are crying
to the moon. None of these steps will make a damn bit of difference.

If the President of the United States truly believes that
volatility/speculation in commodities is a problem that has reached a
critical level and that the situation requires policy response(s) he
should call Ben Bernanke and tell him to raise the Federal Funds rate to
2%. That would solve the problem as far as excess speculation goes. But it will not happen as Bernanke has his foot planted firmly on the ZIRP gas pedal.

ZIRP causes all manner of speculation. It's insane to think that
Bernanke can target this powerful force so that it only has positive
effects like boosting stocks and corporate bonds. With those pluses come some minuses.

If the country wants cheap money and strong equities it also has to have overvalued commodities and high volatility of prices.

You can’t have one, and not the other. Blame the Fed for the speculation, not the speculators who have been drawn to the light that Ben Bernanke is shining.

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Clowns on Acid's picture

Bruce - head on the nail once again.

Price volatility = Opacity of price discovery process - Anticipated real price of money .

As you point out - it is the anticipated real price of money (= nominal interest rates - anticipated inflation) and the the transparency of the price discovery process that will determine price volatiltiy (speculaton and frequent hedging/ unhedging).

If the anticipated real price of money is positive and the price discovery process is completely transparent, price volatility will be very low (buy high dividend stocks).

Given the Fed's policy the anticipated real price of money is essentially negative (for institutions anyway).

The price discovery process has become increasingly opaque given the Fed intervention, both overt (monetary policy) and covert (bailouts, stimulus [who got those $ anyway? full accounting anyone?], QE^ bond buying schemes, etc.,, ).

This administration's "regulations" have also led to increased opacity of the price discovery process.

The "market" is a wild animal operating on instinct (ok..algos too) and its instincts can smell that the Fed doesn't have real interest rates or opacity in its heart.

Market volatility will only increase until Federal deficit is cut substantially and the Fed stops abusing the wild animal.

Orly's picture

Now may be a time to consider a long position in GBPJPY.

The pair is trading near all-time lows, bouncing around a major Fibonacci retracement level at 134.912.  The move may be gradual but a return to the mean could put the pair near 178.565 over the next several months.

This level is still lower than where the pair traded before the crisis and a 50% retracement of that move alone could have the pair trading at around 187.

Needless to say, these moves are ginormous.

There are several reasons to trade the GBPJPY pair higher, fundamentally speaking:

First, the global central banks, including the Federal Reserve, have admitted to having placed a floor under the pair by buying Japanese yen on the open market.

Second, the UK has been the first major economy out of the gate with austerity measures and are well ahead of the game.  Granted, the problems in the British economy and banking system are massive themselves, so it is quite difficult to gauge the true economic picture.  However, it is also clear that problems in the Japanese economy are only really beginning, despite a thirty-year head start on the re-inflation scenario.

Third, expect the Japanese to ramp up pushing their currency to the limit and then some by attempting to re-re-inflate the collapse seen after the destructive tsunami and earthquakes.  This will not bode well for the Japanese yen, especially vis-a-vis a "more stable" and perceivably "undervalued" currency such as the Great British Pound Sterling.

Upside target: 182 by year's end.

Or not.  :D


Clowns on Acid's picture

Orly - I am on that trade, a bit early however. The water is only up to my bottom lip at the moment, but I believe in the possie.

Japanese exports have plummeted and will continue to do so, whereas imports must climb (I am looking to get long rice as well below 14.) The JPY as the anti-carry in the carry trade will be replaced by the USD, to buy PMs mostly, and maybe some Cable as well.  Good call and analysis. Thanks. 

Orly's picture

Thanks for that.  I appreciate it.

The only reason I am wary of trading the USDJPY pair higher, despite the near-perfect correlation between the movement of the USDJPY and the GBPJPY of late, is because I am sure that Unca Ben has some more shenanigans up his sleeve, while the British are looking for some legitimacy in the global marketplace as it is reflected in their currency.

So, the Fed bought a billion dollars worth of yen?  Gee, for real?  Not even a drop in the bucket.  But to truly save the Japanese yen from self-destruction, there is no telling what the US might do.  At least I can sense that the British are ready to get back on the horse to save face after the totally embarrasing collapse of the Pound in 2008.  I can trust that to a degree.

I am not sure the Bernank would be embarrassed about much of anything.  I can't trust them at all.


Clowns on Acid's picture

The Grey Lady is indeed trying to instill confidence in the GBP only cause they have to. Britain's economy is built (solely these days) on banking and to a lesser extent London property. Both of which are becoming more reliant on inflationary expextatios to carry them out of the morass. So they verbalize restraint and sneak in a .25% hike the end, well y'know.

The London property market is atificially being propped up by hot Russian, Asian and more recently middle eastern buyers looking to buy geographical insurance. How long will the average Londoner (or ex- Londoner) put up with unoccupied townhouses in Chelsea that are owned by non foreigners? 

No easy answers, but I do agree that Moonshot Bernanke could do anything to preserve his reputation (it is going downhill at a rapid rate of knots), however I do think that the probability of the REP House holding out for substantial Fed spending cuts will increase this week and USD strenghtens, S&P sees further weakness. Not enough pain yet for Moonshot Ben and is band of wanna be astronauts to lobby for QE3 or whatever they are going to call it. But there is pain surely to come...which will be near term USD positive. Cheers.     

Herbert_guthrie's picture

Don't blame the FED for anything.
Blame its owners.....

sgorem's picture

I look at this as a two sided affair. On one hand you DO have Scumbag Speculating Sector that don't have any real skin in The Game and don't give a shit about anything, or anyone but themselves(may they rot in hell).  On the other hand, we have the Scumbag Goverment trying to blow smoke up the sheeples asses to make it look like they are really trying to do something to try and stop this run away freight train we call INFLATION/STAGFLATION. Fuck 'em both. We need a revolution to take our lives back, and save the lives of our children and future generations from BOTH of these vampires.

Widowmaker's picture

Check out the Mahogany Ridge project.

A little about it is here:


Sisyphus's picture


You changed your previous post, where you had asked the question if anybody had a link to article about Shale and Shell. Why? Okay, I've read the article and here are my questions.

From the article

This acceleration of natural processes is achieved by drilling holes into the resource, inserting electric resistance heaters into those heater holes and heating the subsurface to around 650-700F, over a 3 to 4 year period.

So what's the energy source for heating the subsurface for 3 to 4 years to around 650-700F? Massive fail, IMHO.


Again, from the article.

First, anything that heats up rock around it to around 600 or 700 degrees Fahrenheit has to conduct electrically generated heat well. The most conductive metals on the Periodic Table of Elements are, in order, silver, copper, and gold. Naturally, the number of heaters you put in a place affects the amount of time it takes to turn the shale goo into API 34 crude. The more heaters, the more cost, though.

So, Silver, Copper and Gold to the moon? Orgasmic.


From the article.

Shell thinks the whole thing is economic at a crude price of $30.

Now, we are talking. So, this technology is not viable after all, unless we go into a deflationary depression. Or am I missing something here?

Trav..., Flak..., anyone?

downwiththebanks's picture

Does the author not recognize that the PRIVATE BANKS WHO OWN THE FED are the chief parasites?

All the other little banker-gangsters are but following the lead of their masters, bosses, and employers.


Bartanist's picture

Yes it does beg the question of who is REALLY calling the shots. Bernanke looks like a sick geek who just got caught up in something that is so far beyond him that he is simply hoping to escape with his skin ... and no thought of his soul (or he has been deluded with lies).

But he appears to be a very weak human being.... then again, maybe it is just an act.

razorthin's picture

Yah think, Bruce?  I mean really.  We are the choir here.  Submit your letter to O'Reilly and see how quickly he airs it...NOT.

jm's picture


Another aspect of this is the growth and widespread investment in commodity ETFs.

How big the money is I don't know, and I don't blame anyone wanting commodity exposure anyway they can get it.   Retail is undeniably a part of the equation, and arguably this magnifies the instability as people rush in and out. 

geno-econ's picture

What is the root cause for all this speculative, leveraged economics???

Perhaps the global economic model no longer favors the hubristic developed economies relying on a modern service economy allowing us to pilage and steal from one another rather than creating real wealth and added value. Polititians in denial only create bubbles and kick the can while China prospers until total collapse of entire financial system. Meanwhile US is in last stage of asset and currency destruction with elitists living off past wealth or pretending America will regain its economic might. Keep dreaming America

downwiththebanks's picture

Politicians don't create bubbles.  The banker-gangsters who own them do.  They simply award the Politicians who defend them with some of that free money they get from sponging off those who work for a living.

falak pema's picture

the future is  a roller coaster of derivative trades that the FED proposes with its QE  manipulated monetary fix; but that the world disposes...with it can't pretend for long you are not naked Mr FED...

TooBearish's picture

Bruce - I think you are one of the best and more thoughtful analysts here in the ZH community - but connect the dots on commodity prices more correctly please - lower USD means higher commodity and stock prices, with commodities outperforming... the opposite is true ie higher USD lower equities and commodities....until we get into a wage price spiral like we had in the 70s.    Then way higher commods and equities under perform.


Gold should be more resilient than the basket of commods on the down side.

S.P.Q.R.'s picture

I suspect Bernanke fully understands cause and effect but he's a follower, not a leader - which is probably how he got the job. Fed action now has nothing to do with setting monetary policy, its simply become monetization tool. Thats what the game is really all about - how to finance a deficit that without fed intervention would overwhelm debt markets. 300-400B could probably find a home, 1T+  not a chance. Its not going to end, the political animals intend to have one last keynesian orgy. I'll be guessing we'll see administration go all-in late in the year, after that its somebody elses problem.

dcb's picture

everyone knows it it the federal reserve, But the power that be can never say or admit it. Haven't we seen the nernanke lie so often we expect it. Please I know there will be other arguments, but it is a smoke screen so they don't have to stop QE. I find it insane that no official voice will actually tell the truth. It says a lot about our system of  government.


Although I am all for margin hikes, and think stock market and financial asset margins should always be high. it would make the system much more stable. but it cut into banking porfits therefore there will be much cry baby activity around the idea


all of these public statements are just about banking profits, but to get what they want it has to be stated another way.

I know about this, because in the hospital it is always about patient care and safety. Put what you want in those terms for public consumption so you get what you want. The federal reserve is no different, and in fact such procedure is the norm in washington. It's a farce.

The academic economic community is also bought and paid for to give cover to silly economic thought (rational, efficient markets, (LOL)). provide the cover, get a higher position, better position at the bank. All of the language is double speak, and has nothing to do with reality. the bogus arguments are put out so congress can vote with their pocket book for the big donors, but the cover is needed to justify their vote. Why do you think you so often see the republicans advancing such silly things.

Look at the consumer agency, the things said about warren, the straw arguments about the damage it will do, too much power, etc. Those arguments are the talking points given to them by the corporations which they pay for.


Come on, the oil guys saying to take away their tax breaks is unamerican. did any of them mention it would hurt stock prices and therefore their pay. In fact I have never seen a corporate officer on the hill when making an argument discuss their pay. It never even enters the dialog. that's because they are so selfless (LOL)

So Bernanake wants to engage in wealth transfer to the banks/bankers/wealthy. He can't call it that and can't point out the damage it does. But we all know what it is really about

When he leaves the fed he will always have great consulting work, speaking fees, etc. He will be very welltaken care of for life for doing what the bankers tell him to do.

ThisIsBob's picture

Once its tossed it out of a chopper, money will go where its treated best.

anony's picture

I don't mind the speculation one little bit. I just wish I could get it consistently right, in snych with the Masters of the Universe, who are manipulating it.

As long as there is this kind of volatility there is a chance get real rich, real quick.

Without it, if markets were very calm, there wouldn't even be that chance.

downwiththebanks's picture

Nothing wrong with speculation:  just put up 100% margin and use your own fucking money.   And pay a tax on your turnover. 

Too many of these parasitic banker-gangsters are gambling at 10,000x leverage with government welfare.  Time to cut them off - that's the first step.

Summary executions come later.

anony's picture

Naw, I get about 100 grand in offers at 0% interest credit for up to 13 months.  As long as I make the payments every month, I pay no interest.

It's FREE money, even better rate than the Fraudsters get, albeit, on a much more miniscule scale.

Some credit is good.  I just wish I had the 'nads to have put it all in, in March 09.


That's what's missing. But I have no doubt that some folk I see with new rides and expensive wheels have made out like bandidos and cashed out with their winnings.

downwiththebanks's picture

Conflating a time-tested marketing ploy used by banker-gangsters find new victims with the Fed policy of shoveling cash to their shareholders obscures the issue.

Remind me why parasitical speculators shouldn't pay tax on gambling that blows up the global economy?

Do you agree with Krasting - the speculators' and their little laptop computers are too powerful for 6,000,000,000 people to take them on?

digalert's picture

I believe the Bernank is a NWO/globalist. The goal is one world government, one world bank and of course a new one world currency. When bubble Bernank is cornered like a rat, he'll say a NWO is the only solution. He'll blame the US government for reckless fiscal policy. With United States fiat scattered around the globe, do you think the world is pissed at the the US now? just wait

kaiserhoff's picture

Great piece, Bruce.  The volume speaks volumes.  Some writers, notably in Barron's have been similarly concerned about excess activity in FOREX.  Any thoughts?

ZeroPower's picture

People complain when a market isn't deep enough, and they complain when its tooooo liquid as per your "no its not necessary/desireable" observations.

Maybe there should just be no market?


But then people would ask for one. 

anony's picture

The market is a metphor for the atheists who know that there is no 'god.

The markets were invented because if there were no god, people would find it necessary to invent her.


Milestones's picture

Yea, and the fact that she is green kinda throws them.

downwiththebanks's picture

Or the Tooth Fairy.  Or alCIAda.

'The Market' is the construction defenders of Capitalism use to justify the theft of América and the slave trade.

Lucius Cornelius Sulla's picture

The MSM is playing along with the politicos in blaming speculators.  It is an uphill battle trying to educate the sheeple on the root cause of commodity price inflation.  Some people get it, but ignorance is rampant in the USA.

Captain Planet's picture

Sorry to add some 'junk' to the only comment section on ZH that is free of drivel, but this is just plain funny.

lamont cranston's picture

Sadly, there's always truth in satire. Think I'll drive the 6 miles to Boone and validate this article's thesis at WalMart.

Captain Planet's picture

for your own safety, I wouldn't give such a precise location of your home. though to my knowledge, you have yet to confirm that you are a silver bug

lamont cranston's picture

No silver bug or gun nut here. Given the level of black budget technology, the big boys can track us down anytime they want.

BTW, the 400 lbs of female on a WalMart scooter just viewed is:

a. diabetes on wheels

b. sickening

c. laughable

d. all of the above

takinthehighway's picture

Captain, you're absolutely right regarding OPSEC, but, given my knowledge of that area, six miles out could still be really hard to find.

lamont cranston's picture

With drought in Texas and everything else underwater along the Missouri/Mississippi/Ohio Basin, coupled withe the whole ethanol mandate fiasco, I'd think corn, wheat and beans will soar, unless Uncle Ben actually does not instgate QE3 and the USD gains traction.

The unstated problem could be that, come December, China, Russia, etc. demand delivery of said commodities, removing them from domestic use. I'd never hazard that there could be an honest to God bread shortage in the US, but it's not a far fetched idea these days given current leadership.

onarga74's picture

This is just another housing disaster with different clothes on.  Wait a bit and Blankenstein will be in front of our elected and erected explaining in great detail why he used our bailout money to bet on rain/no rain.

What's the big deal?  Anything that anyone can imagine can be pulled out of a congressional ass.

aerial view's picture

Ben is like the new chemist playing around in his meth lab: he made some unstable ZIRP meth, TARP meth, QE1,2 meth and still hasn't blown up the lab; in fact, he has become addicted to making more and more meth expecting to control the ultimate outcome. God Complex anyone?  Unfortunately, we all know what happens when an unforseen event ignites the lab.

tony bonn's picture

best article of the week

lizzy36's picture

I am not sure Bernanke understands the extent to which commodities have been securtized, and then sold as an asset class (o/s of poor natural gas the only commodity due to delivery restrictions that still trades supply/demand). He missed the way subprimes was securitized COMPLETELY.

With respect to speculation, why would anyone invest in the future, with ZIRP, and advantageous tax treatment of capital gains which incentivize speculation over investment.

onarga74's picture

I worked for Dean Witter in the 80's when managed money for larger retail $ was a new product where the brokers turned consultants really found the jingle.  I had a note under my pillow that said "Ma'am, it's not about timing the market.  It's about time IN the market." 

"Diversification" was for folks up to 100k. For anything over 100k they were known as "non-correlated assets" which included betting on rain/no rain and fading Mad Cow. They're called Managed Futures.  Think about those 2 words for a while.

VegasBob's picture

Bernokio is just a common criminal.  His QE programs are the functional equivalent of counterfeiting.  When Bernokio floods the monetary system with trillion$ of counterfeit electronic dollars that look exactly like real dollars, then prices of tangible goods (commodities) are going to skyrocket.

We should go back in time about a hundred years when harsh justice was meted out to common criminals.  Bernokio should be charged with counterfeiting, fraud and grand theft.  He should be tried, convicted and hanged.  That single act would restore sanity to the world's monetary system.

Milestones's picture

Don't know about the hangin thing--Joan of Arc comes to mind.      Milestones 

Hedgetard55's picture


Once Bernanke has forced Grandma and Grandpa into risky assets by making cash literally trash, the boyz will pull the rug out again and decimate them.


This is the mother of all sucker rallies.


Lucius Cornelius Sulla's picture


That's exactly what I am positioned for.  The Bernanke cannot hold the house of cards up for much longer.  There is too much pressure from Main Street.  Besides, the USG cannot afford to have bondholders call them on their bluff.  The FED may be able to manipulate the bond market in the short-term but inflation and foreign governments' refusal to bid will eventually force his hand, IMHO.

mayhem_korner's picture

Maybe a little volatile if the printing press is taken off line for scheduled maintenance. 

What fun!