cryptogon.com

A rebound in the U.S. dollar encouraged the sell-off, applying downward pressure across the commodities markets by weakening the purchasing power of buyers using other currencies, dealers said.

The slide adds to a more than 20 percent fall in the price of crude since mid-July and could increase the chance oil cartel OPEC will cut official production limits when the group meets in Vienna on September 9.

U.S. crude fell $6.59, or 5.4 percent, to settle at $114.59 a barrel — the biggest fall in percentage terms since December 27, 2004. London Brent crude fell $6.24 to $113.92 a barrel.

“People who were buying yesterday are taking profits today,” said Peter Beutel, analyst at consultancy Cameron Hanover. “There is also renewed technical selling and talk again of demand destruction. The dollar is strong again too.”

The declines Friday were encouraged by two reports — one showing an uptick in OPEC crude oil output and another showing an expected decline in U.S. travel over the September 1 Labor Day holiday weekend as high fuel prices hit consumers.

Industry consultant Petrologistics said on Friday OPEC oil output was expected to rise in August by 450,000 barrels per day, to 32.95 million bpd, a factor that could further beef up inventory levels in consumer nations.

Meanwhile, the U.S. auto and travel group AAA said that Labor Day holiday travel was expected to fall this year by the largest amount in at least eight years as consumers struggle with higher gasoline prices and airfares.

The men, who were last seen alive Sunday and were discovered Wednesday night, did not appear to have been shot first, authorities said after the first autopsies had been completed.

Thursday evening, Shelby County sheriff’s investigators, the FBI and other officers searched the premises of a red brick, one-level house at 2627 Valleydale Road, apparently in connection with the killings.

Three pickup trucks – white, red and black – were towed from the home’s yard starting about 8 p.m. Investigators also studied a wooded area behind the house. About an hour after the trucks were towed, investigators packed up and left and several people arrived and went into the house.

Shelby County District Attorney Robby Owens, 58, said the case represented the largest multiple killing in the county in his memory.

Owens declined comment about details or angles that authorities may be pursuing, saying they’re awaiting autopsy reports. The men have not been identified.

Investigators said none of the men found dead was on the lease of the apartment. The man whose name was on it was found and was being questioned by authorities Thursday night. Police said that man had not been there for about a month, and they were hoping he could provide more information on the victims.

The Office for National Statistics revised its first estimate of second quarter growth by more than expected as it said output had been flat quarter on quarter, the lowest figure since the second quarter of 1992.

Gross domestic product was 1.4 per cent higher than in the second quarter of 2007, the lowest year-on-year growth rate since the end of 1992.

Economists had anticipated a smaller downwards revision to the ONS’ initial estimate of 0.2 per cent quarter on quarter growth, and its scale and broad-based nature may raise hopes of an eventual cut in interest rates.

However, the Bank of England had already forecast output would stagnate for the next year, and minutes of the monetary policy committee’s last meeting suggested fears of persistently high inflation could keep rates on hold for some time.

In Denver, where Democrats assemble next week, police are spending $18 million on equipment alone and will be bolstered by National Guard troops and hundreds of officers from surrounding suburbs. In St. Paul, Minnesota, site of the Sept. 1-4 Republican nominating convention, police are calling on 80 law-enforcement agencies to provide 3,000 officers to supplement the city’s 500- person force.

Russia has room to store about 95 million metric tons in its silos, according to Russia’s Grain Union, comprising the biggest producers and traders. The government is forecasting a grain harvest of at least 85 million tons, while the union expects farmers to reap 97 million tons.

“This year showed a real lack of storage capacity,” Igor Khudokormov, chairman of Prodimex, a Russian sugar and grain producer, said in an interview in Moscow Aug. 19. “Nobody was ready for this. Now we are having a lot of problems to store the wheat and barley, and all the grain crop.”

Farmers are sowing more crops after prices for corn and wheat reached records this year. The jump in prices had increased concerns that the global food crisis would worsen, after sparking riots from Haiti to Egypt. A food price index compiled by the United Nations’ Rome-based Food and Agriculture Organization peaked in March.

Russia, the world’s second-biggest barley grower, needs to build more elevators in the southern and central parts of the country, where most grain is produced and exported, Grain Union Vice President Alexander Korbut said by phone from Moscow.

Building 100,000 tons of silo capacity in Russia costs about $50 million, said Michael Shneyderman, chief financial officer of Black Earth Farming Ltd. The company farms 143,800 hectares (355,000 acres) of land in Russia.

Construction Costs

Korbut estimates construction costs for 100,000 tons of capacity at about $16.4 million, excluding costs for rail, road and power connections.

The number of available hopper cars and access to ports is also an issue, Korbut said.

The country has 12,500 hopper cars for grains, more than a third fewer than are needed, according to the Grain Union. Of the total, 5,500 are more than 20 years old.

Russia’s total port capacity for exports stands at about 15 million to 18 million tons a year. The country can also send some shipments via Ukraine’s ports on the Black Sea and through Baltic ports, Korbut said.

The government is forecasting grain exports of about 15 million tons this season and has already announced plans to boost grain output by 50 percent in the next five to seven years.

“Russia needs to develop infrastructure ahead of increasing production, removing the bottlenecks,” Korbut said.

Single Harvest

The U.S. has about three times more silo capacity than it can produce in a single harvest, while in Russia “you have roughly the amount of storage you need for a really good harvest,” Allan Mustard, minister-counselor for agricultural affairs at the U.S. embassy in Moscow, said July 30.

The Russian government’s plans for a state grain trader that may control about half of all overseas sales could help improve infrastructure, Prodimex’s Khudokormov said. The government will hold a 25 percent stake, with the rest owned by private firms.

“The government now has lots of money that is lying free,” Khudokormov said. The ownership structure gives “hope it will be run on a commercial basis,” he said.

But when the Commodity Futures Trading Commission examined Vitol’s books last month, it found that the firm was in fact more of a speculator, holding oil contracts as a profit-making investment rather than a means of lining up the actual delivery of fuel. Even more surprising to the commodities markets was the massive size of Vitol’s portfolio — at one point in July, the firm held 11 percent of all the oil contracts on the regulated New York Mercantile Exchange.

The discovery revealed how an individual financial player had gained enormous sway over the oil market without the knowledge of regulators. Other CFTC data showed that a significant amount of trading activity was concentrated in the hands of just a few speculators.

The CFTC, which learned about the nature of Vitol’s activities only after making an unusual request for data from the firm, now reports that financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts on NYMEX, a far bigger share than had previously been stated by the agency. That figure may rise in coming weeks as the CFTC checks the status of other big traders.

Some lawmakers have blamed these firms for the volatility of oil prices, including the tremendous run-up that peaked earlier in the summer.

“It is now evident that speculators in the energy futures markets play a much larger role than previously thought, and it is now even harder to accept the agency’s laughable assertion that excessive speculation has not contributed to rising energy prices,” said Rep. John D. Dingell (D-Mich.). He added that it was “difficult to comprehend how the CFTC would allow a trader” to acquire such a large oil inventory “and not scrutinize this position any sooner.”

The CFTC, which refrains from naming specific traders in its reports, did not publicly identify Vitol.

The agency’s report showed only the size of the holdings of an unnamed trader. Vitol’s identity as that trader was confirmed by two industry sources with direct knowledge of the matter.

CFTC documents show Vitol was one of the most active traders of oil on NYMEX as prices reached record levels. By June 6, for instance, Vitol had acquired a huge holding in oil contracts, betting prices would rise. The contracts were equal to 57.7 million barrels of oil — about three times the amount the United States consumes daily. That day, the price of oil spiked $11 to settle at $138.54. Oil prices eventually peaked at $147.27 a barrel on July 11 before falling back to settle at $114.98 yesterday.

The documents do not say how much Vitol put down to acquire this position, but under NYMEX rules, the down payment could have been as little as $1 billion, with the company borrowing the rest.

The biggest players on the commodity exchanges often operate as “swap dealers” who primarily invest on behalf of hedge funds, wealthy individuals and pension funds, allowing these investors to enjoy returns without having to buy an actual contract for oil or other goods. Some dealers also manage commodity trading for commercial firms.

To build up the vast holdings this practice entails, some swap dealers have maneuvered behind the scenes, exploiting their political influence and gaps in oversight to gain exemptions from regulatory limits and permission to set up new, unregulated markets. Many big traders are active not only on NYMEX but also on private and overseas markets beyond the CFTC’s purview. These openings have given the firms nearly unfettered access to the trading of vital goods, including oil, cotton and corn.

Using swap dealers as middlemen, investment funds have poured into the commodity markets, raising their holdings to $260 billion this year from $13 billion in 2003. During that same period, the price of crude oil rose unabated every year.

CFTC data show that at the end of July, just four swap dealers held one-third of all NYMEX oil contracts that bet prices would increase. Dealers make trades that forecast prices will either rise or fall. Energy analysts say these data are evidence of the concentration of power in the markets.

CFTC leaders have argued that speculators are not influencing commodities’ prices. If any new information arises during the agency’s examination of swap dealer activity, officials said they would report it to Congress.

“To date, the CFTC has found that supply and demand fundamentals offer the best explanation for the systematic rise in oil prices,” CFTC spokesman R. David Gary said, reading a statement that had been crafted by agency officials. “Regardless of their classification . . . the CFTC’s market surveillance group scrutinizes daily the positions of all large traders, both commercial and non-commercial, to guard against market manipulation.”

Victoria Dix, a spokeswoman for Vitol, declined to answer questions. The firm, through Dix, released a statement that stated only that it had not been contacted by the CFTC about the reclassification of its business and that its trading status remained unchanged. CFTC officials said they do not typically contact firms that are reclassified.

On its Web site, the firm says it has $100 billion a year in revenue and describes its thriving global energy-trading business.

For most of the past century, regulators put limits on financial actors to prevent them from dominating commodity exchanges, which were much smaller than the bond or stock markets. Only commercial operations, such as farms, airlines, manufacturers and the middlemen that handle their trading activities, were allowed to buy nearly unlimited quantities. The goal was to allow these businesses to minimize the effect of price swings.

The first major change to this regulatory framework occurred in 1991, when Goldman Sachs, through a subsidiary called J. Aron, argued that it should be granted the same exemption given to commercial traders because its business of buying commodities on behalf of investors was similar to the middlemen who broker commodity transactions for commercial firms.

The CFTC granted this request. More exemptions soon followed, including one to the Houston-based energy trader Enron.

“When the CFTC granted the 1991 hedging exemption to J. Aron (a division of Goldman Sachs), it signaled a major shift that has since allowed investors to accumulate enormous positions for purely speculative purposes,” said Rep. Bart Stupak (D-Mich.) Now, he added, “legitimate businesses that hedge and take physical delivery of oil are being trampled by the speculators who are in the market purely to make profit.”

A second turning point came when Congress passed the Commodity Futures Modernization Act of 2000. The law formally allowed investors to trade energy commodities on private electronic platforms outside the purview of regulators. Critics have called this piece of legislation the “Enron loophole,” saying Enron played a role in crafting it.

In the months after the act was passed, private electronic trading platforms sprang up across the country, challenging the dominance of NYMEX.

“Investment banks had been frustrated with the established exchange because they really were never able to get control of it,” said Michael Greenberger, a law professor at the University of Maryland and a former staff member at the CFTC.

The most successful of the private platforms was InterContinental Exchange, or ICE, founded by Goldman Sachs, Morgan Stanley and a few other big brokerages in 2000. ICE soon opened a trading platform in London, allowing its founders to trade vast quantities of U.S. oil overseas without being subject to regulation.

The exemptions for swap dealers and the development of overseas markets allowed big brokerages to open the door for more hedge funds, pensions and big investors to move into commodities.

In the coming years, commodity investments by funds could grow to $1 trillion, veteran hedge fund manager Michael Masters said in testimony before the Senate earlier this year. In an interview, he said this trend could raise commodity prices for everyone in the coming years and “have catastrophic economic effects on millions of already stressed U.S. consumers.”

Meanwhile, commodities have been good business for big Wall Street brokerages. Its commodity trades helped keep Goldman Sachs profitable during the credit crisis, said Richard Bove, a banking analyst at Ladenburg Thalmann.

“Business is lousy right now,” Bowie said of Goldman Sachs. “Commodities and currencies are clearly the strongest business they have right now.”

By IANTHE JEANNE DUGAN
August 21, 2008; Page C1

As gold prices tumbled from their highest level ever, investors and collectors loaded up on one-ounce “American eagle” gold-bullion coins. The buying spree came to an abrupt halt this week after the U.S. Mint stopped selling the coins for the first time since production began 20 years ago.

“Due to the unprecedented demand…our inventories have been depleted,” the Mint — part of the U.S. Treasury Department — told its dealers Friday. “We are therefore temporarily suspending all sales of these coins.”

The move shocked sellers and collectors of the coins, which are the most widely traded in the U.S. Suppliers became angry as they turned away customers. Theories about the decision’s underlying cause ran rampant — from investors in gold futures to Russia’s invasion of Georgia.

“This whole thing started about the time the Ruskies made their move,” a collector noted in an Internet chat room called goldismoney.info. “It may very well be that the USGovt is preparing for the real financial meltdown by hoarding all remaining gold flows.”

The Mint says it simply was wiped out. It has sold 311,000 ounces of the coins this year — about 50% more than in all of 2007. In the first few weeks of August alone, buyers snapped up 63,500 ounces.

“We are working diligently to build up our inventory and hope to resume sales shortly,” the Mint wrote in a memo to dealers.

The American-eagle bullion program was launched in 1986 with the sale of gold and silver bullion coins. One-ounce coins have a face value of $50 and $1, respectively, although the coins trade close to the market value of the underlying metal. After the 2008 silver coins, known as silver eagles, surged in popularity earlier this year as silver prices rose, the Mint began rationing them. Dealers were upset by the latest blow. “If I don’t have something to sell, I lose business,” says Rand LeShay of A-Mark Precious Metals, a Los Angeles dealer.

The Mint announced the suspension Friday, the day prices of gold-futures contracts — bets on what gold will cost later — finished below $800 an ounce for the first time this year. The drop accelerated a buying spree among investors. Gold began bouncing back and late Wednesday traded at $810.30. In March, gold futures hit a high of $1,003.20 an ounce.

American-eagle gold-bullion coins are made from 22-karat gold mined in the U.S. The front side’s design was inspired by August Saint-Gaudens’ $20 gold piece, minted from 1907 to 1933. On the reverse side is a nest of American eagles.

The coins are sold by the Mint to 10 dealers world-wide for a premium above the price of gold. These dealers resell the coins, which now fetch about $815.

The American Precious Metals Exchange, an online gold dealer, posted an alert about the Mint’s move, generating confused and angry responses. Many customers said they were mystified because the silver-coin rationing followed a price surge, while the gold suspension followed a drop.

“The situation is strange and doesn’t fit the ‘normal’ supply & demand economic model,” the firm wrote to customers.

The Gold Anti-Trust Action Committee, an advocacy group, said the Mint’s move proved financial institutions are colluding to set prices.

U.S. crude for October delivery rose $5.66 to $121.22 a barrel, having reached as high as $122.02. Wednesday’s $114.98 settlement price ended active trading for the September contract.

The last time oil traded above $120 was Aug. 8, when it touched $120.08. Oil settled at $120.02 on Aug. 7.

“The investor class is buying back oil as a hedge because the value of the dollar is weak,” said Phil Flynn, senior market analyst at Alaron Trading.

Another analyst echoed the same sentiment. “All else equal, people would think that in a stable commodity market and a negative financial market – people would have more faith in the commodity place,” said Neal Dingmann, director of equity research at Dahlman Rose.

Armored personnel carriers and troop trucks blocked the bridge to the Black Sea port city of Poti, and Russian forces excavated trenches and set up mortars facing the city. Another group of APCs and trucks were positioned in a nearby wooded area.

Although Russian President Dmitry Medvedev has promised that his forces would pull back by Friday, Russian troops appear to be digging in, raising concern about whether Moscow is aiming for a lengthy occupation of its small, pro-Western neighbor.