The invisible hand balances the supply and demand in both sides of the markets

The invisible hand balances the supply and demand in both sides of the markets.

Some thoughts on the ETFs conspiracy.

Historically, the commodity market has gathered little to no attention from the public during periods of low prices and low volatility. It is during those moments of increased volatility and pressured prices that the industry’s curtain is unveiled to find the two usual culprits: banks and traders.

However today can traders or the banks really be the culprits ?

Banks are prohibited by the Volker Rule to take proprietary positions in the commodity markets and almost all commodity traders since 2011 (the commercials) are short of capital (long story…)

The VelocityShares 3X Long Crude ETN linked to the S&P GSCI Crude Oil Index Excess Return sponsored by Credit Suisse will close next month.

MLPs, managed products and Leveraged ETFs that give investors an exposure to commodities have come under fire by the lawyer$.

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The Wall Street Journal asks Could exchange-traded funds that hold physical commodities exacerbate price spikes or drops ?”.

Some argue that they create volatility… Wouldn’t it be good to know what kind of volatility (historical, implied, realized) they refer to ?

Since ETFs gyrate around their nav, generally, commodity exchange-traded funds that hold physical commodities reduce realized volatility, they do not exacerbate it.

I have students who did a very compelling work entitled “ETFs, Redemptions and Creations Arbitrage case”.

With the example of gold, they explain that it is difficult for ETF to trade beyond the value because banks or ETF sponsors get paid to exploit the inefficiencies between sentiment induced prices and the net asset value.

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Kaminska at FT Alphaville has high caliber pieces on the ETFs (and this column can also be an eye-opener on the commodities for the financial markets).

The physical and the paper markets are the two pillars of the commodity trade.

The two pillars constantly fight with each other’s.

ETFs can be categorized in the paper markets as “financialized commodities”.

The culprit is more often the investment-driven flow (the investors), skewing the forward term-structure implied volatility.

This implied volatility is translated into financial contango.

However, when it happens, odds are good that the commercials read a market not aligned with it fundamentals and reduce their risk exposure (hedge) or turn to their banker to finance, buying, store and making deferred sales.

The invisible hand balances the supply and demand in both sides of the markets.

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Simon Jacques +1-226-348-5610

Commodity trading and finance.

Advising the producer, processor and end-user in North America.

Jacques, S  (2016)“The invisible hand balances the supply and demand in both sides of the markets.”, http://wp.me/p3k7lL-5t8, Navigating the commodities markets with Freight and Spreads ,November 2016.

Navigating the commodities markets with Freight and Spreads © 2016

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