Anyone for a commodity market SHORT SQUEEZE?
The recent default of the Tocom palladium market proved to all who were watching that:
1. It is completely possible to execute a squeeze of a commodity market when warehouse stocks are not sufficient to allow shorts to deliver.
2. A successful squeeze can be highly profitable.
****How was it done?
While I have no proof whatsoever, I think it is likely that Engelhard (or whoever was behind their buying ? Tiger Fund?) played a major role in the squeeze.
Last year I began charting the relationship between Engelhard?s plat/palladium positions and the prices of these commodities, but unfortunately my computer ate the file.
In any case, I observed that Engelhard slowly built up a huge long palladium position by slowly buying in most of the contract months. If I remember correctly, their position reached about 5000 contracts, ALL long.
After they established their position, I imagine that they just let it role through to expiry. The shorts tried to bid the price up to escape, but the longs held on???with no escape from the short position and no metal to deliver, TOCOM decided to shut down the market.
It is interesting to note that a foreign institution had the long position??it could be inferred that TOCOM intervened to protect the local (Japanese) shorts.
****How much did they profit?
While one can only guess, I observed that they owned 5000 long contract when the price was around 1050 yen/gram. If we assume they closed most of it at 2000 yen/gram or higher (price frozen by Tocom at 2300 ? 2400 yen):
5000 x 1500g x 1000 yen (profit margin) = 7.5B yen = $68,000,000
Not bad at all!!!
Now, the next topic I would like to consider is, will this happen again? Based on the warehouse stocks in Japan/US, the plat and palladium markets are extremely vulnerable to another squeeze.
TOCOM Warehouse Stocks:
Plat = 500g x 818 = 409,000g = 12,781 oz.
Palladium = 3000g x 247 = 741,000g = 23,156 oz
Nymex Warehouse Stocks:
Plat = 50 oz x 540 = 27,000 oz
Palladium = 100 x 283 = 28,300 oz
This is obviously a very small amount of metal. For a large organization, it would be easy to take out a big futures position, and let it roll to expiry.
The only risk would be ?sudden? deliveries from Russia. But what if Russia is involved with the squeeze directly or indirectly? Then these markets are theirs for the taking.
Shall we organize a squeeze? 500 investors willing to each take delivery of one contract of platinum could take out ALL of the Nymex platinum stockpile.
Fun, fun, fun???.
The above is all based on my memory of recent events and rough calculations. If there are any inaccuracies, please feel free to point them out (but no flaming, please!).
Thanks,
THC |
