Why commodity trading is not for the beginners?
Commodity trading is done by having a contract at fixed price for a striking price within a contract maturing date. The leverage is extremely high because of the quantity of commodity in question. A penny change could be thousands of dollars you could win or lose. But properly invested on fundamental shortages (long) one contract can make one quarter million dollars in a season, if you parley a second or a third contract later. Any more than three contracts, means you either have to be very rich to lose it all or jump out of the thirteenth floor to leave the debt behind.
The commodity market is controlled by a few very rich individuals sometimes(Hunt brothers in $18.5/oz Silver manipulation, went bankrupt with their oil business and took E.F.Hutton brokerage down with them). The only real commodity business that small investors have a chance at all is in the grains, where over 100,000 farmers all buy only one contract. The fundamentals are weather. You can only buy one contract also.
All other commodities are and can be at any time controlled by large contract purchases. A few thousand contacts up to a few tens of thousand contracts are frequently used to manipulate the market. We call these players, a big fish in a small pond. Don't ever get in the pond with them. The reason is they are the only ones showing(flash) the money. The people who sold the contracts (we call them bookies) never even have the money to pay these big fish if they win money. The big fish depended on publicity to attract your money to go in the market to pay them. The bad effects of a big fish entering the market is they may cause inflation or deflation, if people think the futures price is real everyday price. In fact, commodity exchanges always state that they never delivered any commodities at any time. We have to decouple the stupid concept that a few non-delivery contracts, bought and sold by people not in the commodity business, can be real prices. Real prices buy real goods which has to be delivered to your place or place of business.
Recently, Warren Buffett took over Hunts brothers' silver business and found a bank to pay his winnings. I heard the bank is for sale and only a HongKong bank (another gambler) is willing to take them over. Japanese and Korean banks all have belly upped, gambling with depositors' money on commodities, attempting quick gains without knowledge of who is going to pay for their winnings. Do they have credit? Investors buying "Brooklyn bridge" should always ask who owns it and who will buy the bridge when you want to sell it. Where is the money(beef)? |
