There's trickery in base metals game
Brian Milner
Friday, June 08, 2007
Anyone who spends a few minutes chatting with David Threlkeld will come away convinced that the overheated commodities market — or at least the base metals chunk of it — is about to blow up and that any investors who stick around are about to lose their shirts.
What happened to nickel this week only confirms his gloomy assessment, based on personal experience as a long-time metals trader and adviser, that the market is essentially rigged — and not in favour of ordinary investors.
Nickel futures plunged nearly 6 per cent Thursday on the London Metal Exchange and another 1.4 per cent Friday to close at $42,300 (U.S.) a tonne, well off the record $51,650 reached in May.
Some analysts offered the usual explanations for the sharp reversal of fortune — weaker demand, higher inventories, a long overdue market correction. And, oh yes, there was the small matter of the LME's decision to intervene in the market over suspicions of collusion among the small number of players who control the world's trading and supply.
“Everybody loves to play games. And at the end of the day, you run out of room. We've seen it time after time,” says Mr. Threlkeld. Today, he runs his own trading and consulting firm in Scottsdale, Ariz., but he is best-known for exposing a multi-billion-dollar scam to corner the copper market when he was a top-drawer trader in London back in 1991.
Are we witnessing more manipulation at work? Definitely, he says resignedly, and not only in nickel but the other base metals as well.
“You have all these metals at absolutely stupid numbers, which is unsustainable. And the question is: When reality returns, does it return in a week or a year?”
Here's how Mr. Threlkeld views what has been unfolding in nickel. Producers, hedge funds and other key participants have driven prices up and kept them artificially high, in part by withholding nickel from the market and squeezing short-sellers.
The LME has rules against such manipulation, requiring holders of the metal to lend it back into the marketplace when stockpiles reach a certain level. This week, it changed those rules to cut the amount that can be kept out of the market.
But no one, including the LME, really knows how big the nickel and other metal positions actually are, because a lot of the trading is done “over-the-counter,” says Mr. Threlkeld. “You can only try to guess what exposures are, and you've got no idea what bank exposures are in derivatives or guaranteed prices,” he adds. “My sense is that the LME has one foot on a land mine and one foot in a trap.”
The commodities market has never been for the faint of heart. And even such perpetual bulls as Jim Rogers acknowledge that a correction in nickel and other base metals has been long overdue.
“Something that has gone up that much that fast often has a significant correction. So it would not surprise me at all if nickel went down 50 per cent.” That's not a prediction, Mr. Rogers hastens to add. “I'm just saying that nickel is overdue for a tidy correction, given the scope of what's happened.”
Even after the recent selloff, nickel is still up more than 500 per cent in the past five years. So a major decline would put a big dent in the profits of Canadian producers, which is why investors in resource equities always need to keep a sharp eye on commodity shifts. And not only resources.
“If you get a rapid selloff , it's going to have a domino effect,” Mr. Threlkeld says. “People who have positions in metals always have positions in oil, bonds and this, that and the other thing. We'll see liquidations of those assets to deal with margin calls.”
Sure, you could write off Mr. Threlkeld as yet another conspiracy theorist, of whom an inordinate number reside in the commodity world. But if you keep pumping money into metals that remain well above historic highs, you're playing into the hands of the pros who live for these times when the gullible throw money at investments they don't understand and whose risks they don't fully appreciate.
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