Beware of the Public Views of Successful Commodities Speculators

It takes a great gambler to become a successful commodities speculator. You probably won’t find those words anywhere in George Soro’s book called the Alchemy Of Finance because that is not a part of the fantasy and illusion that the book wants to sell to the reader. Speculators in commodities, currencies , real estate and virtually anything else are risk takers. Unlike other types of investors from the passive and long term investors to solid business executive types guiding companies though time and space, speculators live in a dangerous world of using leverage to the extreme when they sense an opportunity to make money. There is nothing like a lot of borrowed money to give one leverage in making deals to gain incredible instant gratifying yields that can outdistance the success of any other type of investment. Risk and Reward do not necessarily come hand in hand with each other. Major leveraged speculation more often results in total disaster than it does in extreme success. Great speculators can ride one great bubble after another to the top of a dizzying high cresting wave and successively bail out just before it crashes to make millions or billions of dollars faster than most geometric progressions can advance but then in one fateful leveraged trade they can completely lose everything that they had once gained. History is littered with stories of great plungers and speculators who had amazing careers that suddenly collapsed but not necessarily because of cheating , graft or running a ponzi scheme but just being on the wrong side of one or more trades with too much borrowed money.

We recently saw a great speculative bubble in American Real Estate pop and suddenly a lot of successful home flippers who were always just a bunch of leveraged speculators speculating in the commodity of residential real estate found themselves forced to walk away from mortgages that only a year before seemed like an absolutely sure thing. The United States had great commodities bubbles in Everything from Real Estate, Gold , Silver and Cotton to name a few with lots of speculator train wrecks littering the wakes of each successive breaking wave crest. The Texas Hunt brothers appeared to be amazing speculators as they appeared to be capable of cornering the world silver market back in 1980. They could have controlled all the international finance on earth had they been successful for a least a few centuries. Unknown to them at the time they were seeding their own financial destruction and it was not just due to government/ market intervention and regulation that occurred in 1980. They had loads of leverage and the world had plenty of silver troy ounces ready to sell as soon as the market hit a threshold where a non interest bearing commodity could be unloaded and converted into instant unbelievable wealth. There is nothing like the temptation to sell commodities fast as getting unbelievable high prices for doing so. The markets instantly sent that signal and silver spiked to a peak and then ultimately fell faster than it rose in price in the first place . It bounced back up a few times as buyers thought maybe there was just a temporary correction going on. The chart shows pretty clearly that net sales were driving the market from the peak all the way back down to just happened to be a more gradual predictable trend line where one could disregard the bubble as an unfortunate blip in the progression of prices in a longer duration.

When you read a financial magazine or turn on financial television and you see a George Soros, or Jim Jim Rogers or someone who is the latest Dr Market Doom and Gloom telling you the end is near, yes they could be correct or maybe the opposite. One thing is for sure is that their opinions expressed may or may not match their personal market interventions. You do know that they would of course make the most money on a leveraged trade especially if they were betting on longer odds with potential higher pay outs. Who other than wild commodities traders would want to assist markets in trending toward inevitable bubbles that cannot sustain themselves over the long run. A great speculator having trouble finding bubbles and ensuing panics might just want to help generate a popular ethos in the market that could lead to the best unsustainable miscalculations by other investors. One of the longest odds which happened to have the best pay offs was in helping to cause the markets to collapse whether because of rational behavior or irrational psychology or a combination of both. Some of the best long term speculators who survive over time and are seen to win their bets most of the time both help ride the investment up and then reverse their positions to assist it’s collapse while profiting wildly. If crude oil seems expensive and you want to make money on it as a speculator you first want to have markets believe the world is going to run out of it because supply and production are inadequate to quench the thirst of demand for it. Cashing out before it reaches the top or plateaus out the shrewed speculator may want to see if high prices are bring more reserves to market faster with the potential of reducing the price in fast order creating a vital leveraged opportunity to short it for instant gains. Now turn on the TV or read the financial pages and realize why the commodities speculators often seem to be out of step with the recent activity in markets and band wagon behavior of the great masses of investors involved in trading. Once a speculation is noted to be successful with amazing results in his or her investment life then it becomes public knowledge that other traders will follow. Smaller Me-to traders maybe risking more because of leverage or timing than the big successful trading firms of specialized successful commodities speculators. Its like sheep being led into a wolf’s pen especially in zero sum markets where supply exactly has to meet demand as if one cancels the other out to equal zero. Which means winners will destroy losers. Many commodities trading markets reward 10-30 percent of market participants while smashing 70 -90 percent of the traders involved,

For the brilliant commodities trader success is achieved by taking the longest odds and realizing the winning bet on those odds compounded with leverage. In real estate speculation one can put a tiny bit of money down on a very expensive piece of real estate and if appreciation occurs coupled with high rates of inflation then the speculator can end up owning vast amount of property for much less than the cost of the loans. Time translates into money and Fast time can translate into much much more money. Things don’t always work out the way they are anticipated to do so by speculators which is why they need to cut their loses at a moment’s notice and they need to hedge their bets just to survive any mistakes in judgement. It all becomes very sophisticated business. The most sophisticated part of it is in creating illusions of discrepancies in supply and demand to influence other traders to make poor if not rotten decisions that will benefit the super traders. That might seem to be the whole reason why George Soros has built up a great propaganda news media resources. Big commodities traders can move markets just by being watched by others operating in them.

The next time you hear some financial presentation that you had better buy gold when it is 3 to 5 times the cost to produce it from the most efficient operating mines you might reconsider buying gold and might consider the mining companies instead or better yet you might realize someone is going to make a heck of a lot of money betting on the complete collapse of gold prices while every one else is still in a frenzy buying it at sky high prices. The people most adept at making money betting on the longest odds and doing that on credit are not going to go on television and tell you that not to panic and to stop preparing for armageddon when they need you be one of millions in the market causing the price levels to become completely unsustainable. Just because something fared well in the market especially during a boom time buying rush does not mean that you can extrapolate infinite future appreciation of the asset because the markets naturally respond to scarcity pricing with as much new supply or substitutes as can be found. The greater fool theory is a dangerous game because once enrolled in the game you have to be the one to sell out first ahead of the crowd or be shorting the market once it can no longer be sustained. There is no advance warning system to know when the time to sell is to be out at the top especially when you see that production costs are much lower than retail market sales prices.

Beware: When you listen to the advice of someone selling the end of the world tomorrow those are probably long odd to begin with they want you to bet on or because they themselves want to get out . You buy gold from a gold dealer who as it happens just happens to be selling off his supply while you are buying. Why would a gold dealer not just hold all of his gold and wait for prices to continue appreciating instead of selling any . Listening to a maverick commodities trader give you financial advice based on gloom and doom scenarios you should be wondering why they would be giving away such valuable proprietary information in the first place. If the world is coming to an end and the dollar is doomed don’t you think the US government might try to seize your gold the way FDR once did to make the government’s finances better at your expense? If you can’t see it in your own country watch the Chinese being encouraged by their government to stock up on gold and wonder why the government might see an interest in popular gold hoarding in it’s own future interests?