I am indebted to Mineweb reader Dr. Fraser Murrell from Melbourne for some thought provoking comments on how the world’s futures markets – notably COMEX and NYMEX – are instrumental in keeping commodity prices down to the advantage of first world nations at the expense of their poorer brethren who provide most of the world’s supplies.
The views are particularly apposite with regard to the principal precious metals, gold and silver, and perhaps even more so in the platinum market where prices are currently being kept below the true cost of production.
The premise, according to Murrell, is as follows: “The West (America & Europe) produces very little of the commodities that they need and consume, but have managed to more than compensate for this by having both a printing press (to print trillions of paper dollars on demand) and a futures market with which they can set the price of the commodities that they want, in the currencies that they print.
“On the other hand the producing countries, which actually own the resources, are forced to sell their commodities to the West at the prices – and on the terms – dictated by the futures markets. In other words, since the inception of futures markets in the West, the poor producing countries have been forced to sell their scarce and valuable commodities in exchange for the West’s freshly printed paper.”
This, in some specific cases, may be backed up by the threat of force and/or sanctions if the producing nations do not comply, although this is perhaps not the case in respect of the precious metals, but certainly has been seen with respect to oil and gas producing nations.
Murrell goes much further in his treatise, some of which we find hard to agree with, but the basic futures market scenario certainly strikes a chord. He thus notes further: “The price of these commodities contracts is predominantly set by the CME group on COMEX and NYMEX in America, which in turn are only rarely settled by physical delivery, with most contracts being rolled over from month to month.
“Daily trading in paper futures often exceeds a full year of physical mine supply and so, by sheer volume of trading, the futures market dominates the physical market, rather than vice versa. Furthermore, the futures markets act as an additional source of supply, because they can create ‘out of thin air’ and sell into the market commodity futures contracts to satisfy demand. This enables the futures market to set any price that it likes, almost regardless of supply and demand fundamentals.”
Taking this scenario further, Murrell comments that it is in the interest of the Western consuming nations to set these commodity prices as low as possible and, by virtue of their usage of the futures markets, to do this they are in effect corrupting market supply/demand and pricing basics. They can thus acquire the supplies they need, while setting a price that suits them through the futures markets and print out of thin air all the currency needed to pay for them.
Meanwhile, the actual producing countries are thus forced to accept prices for their products that may even be below the cost of production due to the ‘market price’ set by the futures markets and then in exchange just receive potentially worthless paper which they will warehouse as currency reserves.
Murrell takes the overall West-favouring scenario a step further by pointing out that these currency reserves are necessary for these countries to protect their own currencies in the light of ever continuing attacks on product pricing via the same futures markets. This does not only keep commodity prices low for the consuming nations, but also reduces developing world tax revenues thus perpetuating poverty in those countries.
Now maybe some of this is a little over the top, but there has to be a strong element of truth in the impact of the futures markets on commodity pricing – whether this is one of the less-appetising facets of the capitalist system as practiced by the bankers and financial institutions, or whether this is an ongoing result of great game politics whereby the strong continue to dominate the weak, is perhaps rather more open to question.
Murrell goes on to cite South Africa’s platinum industry as a great example of how this all pans out. As the producer of around 70% or more of the world’s platinum – a vital metal in catalysis and in environmental pollution control – it thus has a virtual monopoly of the metal’s production and should thus perhaps, in theory, be able to set the price it sells at. Yet at a current platinum price of around $1 250 an ounce, many of South Africa’s platinum mines are producing and selling metal at below the true cost of production – which Murrell puts at nearer $2 000 an ounce.
Murrell reckons that the annual demand for platinum is around 8 million ounces (and increasing), while the annual mine supply is only around 6 million ounces (and decreasing), thus suggesting a severe deficit (supposedly) made up from stockpiles and recycling.
But despite this he comments that by virtue of its use of the futures markets NYMEX has ‘manipulated’ the price down to the current $1 250 an ounce. This means, Murrell says, that the West gets its platinum far cheaper than if it owned and mined the platinum resources itself, but without having to invest in risky and difficult mining operations nor having to do any of the actual mining work itself
Even more incredibly, Murrell avers, “NYMEX controls the platinum price with paper futures that only create the appearance of a fair and active market, because there are currently zero contracts either trading or standing in either of the spot (November 13) or next month (December 13). No trading and no open interest means there is no physical delivery. Nor does it appear that there has ever been physical delivery in this market!”
Thus, in his opinion, quoted platinum prices are actually meaningless because the market is thus no way a two-way affair needed for market balance – a process which he describes as an ‘outrageous scam’.
Looking at the market for physical platinum the amount registered for sale on NYMEX is only around 50 000 ounces, thus around 1/160th of global annual demand meaning that the price is controlled by the ‘manipulators’ on the basis of a minimal amount of physical metal, and at virtually no cost.
Of course, there are huge parallels in terms of futures prices driving the physical price markets for both gold and silver with virtually no relation to market fundamentals. Murrell reckons that US government policy is at the root of the ‘manipulation’ and the body set up to regulate the commodities markets, the CFTC, is thus complicit.
While some of Murrell’s arguments are perhaps open to question and some of the points he makes in a long communication to Mineweb are perhaps prone to some exaggeration in our view, his basic premise that commodity prices are driven by the futures markets and massive paper transactions, all to the advantage of the consuming nations and with no relation to physical supply and demand, do stand out as being wholly plausible.