August 21, 2008
Update: The Washington Post published an article yesterday about an investigation on oil speculators by the Commodity Futures Trading Commission. So far they have discovered that Vitol, who is supposed to be buying futures for actual delivery, was holding oil contracts as a profit-making investment. Vitol holds 11% of all oil contracts. They also discovered that financial firms speculating for their clients or for themselves hold 81% of oil contracts, which is substantially more than they had previously reported. The investigation found that on June 6, the day crude oil increased by $11, “Vitol had acquired a huge holding in oil contracts (57.7 million barrels), betting prices would rise”.
The Post article is three pages long and is extremely informative, and you should read the entire article. This is the hyperlink to the Post’s article, but you may have to be a subscriber to their online site, or become a free subscriber, to access it.
From early January thru late July of 2008 oil prices have gone from an average of $85 per barrel to as high as $144 per barrel, although as I write this the price is around $120 per barrel. A lot has been made about such a drastic and unprecedented price increase. Just about every imaginable reason has been given for the increases, ranging from the totally ridicules to reasons that can be easily believed. But the one reason that is most defended as not the reason is the one the vast majority of Americans believe to be the real reason; speculation.
On August 13th CNBC reported that oil demand was lower in December of last year than it had been since 1982. On August 15th they reported that gas usage was down for 16 straight weeks.
If you actually pay attention to the business channels instead of just watching them, you will begin to notice a particular pattern. It is nearly always investment company spokespersons who are telling us what we should be investing in. Practically every segment of every show will have one or more of these spokespersons as part of the discussion. Even if a particular recommendation is not currently doing well, we are always told that it’s going to make a turnaround, and probably soon, so we need to be poised to take advantage of it.
Now I realize these investment “experts” are the ones who are supposed to have their ear closer to the ground, so-to-speak, about what is doing good, what is doing bad, and what the future looks like relative to investment opportunities. But every one of them has a vested interest in what they are recommending; therefore if folks don’t invest with them, they’re out of business. Just a few days ago I wrote a post about this very point, singling out a particular oil speculator who was insisting oil would go to $200 a barrel; therefore we should jump on the band wagon.
Today as I watch several of those oil speculation boys hype their product, I suddenly got visions of another attempt to create a market many years ago. If you’re younger than 35 years old you probably won’t remember the Hunt brother’s, Nelson “Bunkie” & William Herbert, but you may have heard of them. The story begins with them deciding to buy precious metals, mainly silver, to hedge against inflation. Then greed set in; they decided to corner the market on silver. And it worked in sorts, and they were almost successful.
When the Hunt brothers first begin to buy, silver was around $1.95 per ounce. Six years later it was about $5. Less than a year or so later it was $50 an ounce, and then peaked higher. Once the Hunt brothers had a huge chunk of the worlds known silver, they started telling everybody that silver was in short supply, convincing many other investors to start buying silver, which helped fuel the price of silver. Eventually the brother’s started believing their own rumors and bought more. The Hunt brothers, allied with some Arabs, eventually ended up with about one-half of the world’s silver.
In 1980, along with action taken by the Federal Reserve & Wall Street, the price of silver starting dropping like a rock. It fell to less than $11 an ounce. The Hunt brothers lost just about everything they had, then arrested and convicted of conspiring to manipulate the market. Thousands of other investors, as well as some investment firms, lost everything.
Just a side note. I would be the first person to tell you I am not an originator of new ideas; far from it. So with that in mind, I will tell you I was actually shocked at the number of articles that made comparisons of the Hunt brothers silver venture to oil speculators when I went online to find a couple of articles to give you about the Hunt brothers silver dealings. I took that as validation of my comparison. I won’t reference any of those sites as you can find them as well as me, but below are a couple of sites on the Hunt brothers silver run in case you’d like to read about it in more detail.
An outline - The Hunt Family Silver Venture
Never underestimate the difficulty of changing false beliefs [with] facts.
Economist Henry Rosovsky