If you thought the Hunt brothers story we discussed in class had a moral which was implemented, think again. It was repeated almost two decades later, with very similar consequences. This time though, it wasn’t silver, it was copper. And it wasn’t the US, it was Japan. And the firm was in on it. And just when you think it couldn’t get worse – so were the Chinese. What a sordid tale.
The world copper market is immense; nonetheless, a single trader, apparently, was able and willing to dominate that market. You might have thought that the kind of secrecy required for such a massive market manipulation was impossible in the modern information age–but Hamanaka pulled it off, partly by working through British intermediaries, but mainly through a covert alliance with Chinese firms (some of them state-owned). And as for the regulators … well, what about the regulators? [link]
We will be talking more about copper and the consequences of hoarding copper today in class, when we discuss commodity futures, backwardation and do the contango (not an Argentian dance). Meanwhile, here’s something from The Economist‘s Buttonwood:
A commodity ETF will normally buy the future, not spot, to avoid storage costs. But sometimes the commodity will be in backwardation (futures prices are below spot) and sometimes in contango (futures are above spot). Backwardation gives futures funds an additional positive return, as they buy low and sell high; contango reduces the return, leaving the futures buyer trailing the spot. And a lot of markets have been in contango. [link]