Commodities trading is dominated by a dozen or so large commodity trading companies. In addition to trading commodities, they also product/store/transport these commodities. The top 10 commodity trading companies have more than $1.2 trillion in revenue each year, with profits in excess of $100 billion! The shocking thing is that unlike banks, commodity trading companies have very steady trading profits. Meanwhile, all the banks combined earned less than $2 billion in trading commodities last year. In fact, the top 5 commodity trading companies are almost as big as the top 5 banks in the world! These commodity trading companies are highly secretive as most are privately owned.
The existence of these commodity trading companies has several implications for individual traders, hedge funds, and banks.
Who trades commodities
Commodities markets are very different from stock markets. Stock markets have many players, which is why there’s no definitive “smart money” and “dumb money”
- Retail mom and pop investors.
- Hedge funds, pension funds, mutual funds.
- Governments (i.e. through QE)
- Professional speculators
- Investment banks
- Trading corporations
On the other hand, commodities markets only have 2 types of players.
- Smart money commodity trading companies.
- Dumb money speculators, hedge funds, banks.
*Retail investors only pile into gold when gold’s bull market is almost over. Otherwise, they are not a factor.
Because the commodity trading companies are so large in the commodities space, they effectively dominate and “manipulate” this market. They create much of the price action, thereby triggering speculators’ stops, sucking speculators in at market tops, creating patterns for speculators to recognize, etc.
That is why although many speculators can consistently profit from the stock market, few speculators consistently profit from commodities. Banks/hedge funds are no better at trading commodities than speculators.
Manipulation works best in markets where there are only 2 types of players. In the stock market where there as so many different forces, it’s hard for one force to dominate and manipulate the market.
Do not trade commodities with real supply and demand
All commodities (besides gold and silver) have real supply and demand. Trading these commodities is suicidal because you are at a serious information disadvantage.
The commodity trading companies not only trade commodities but also control much of the supply! They essentially have insider information (know exactly how much supply there’ll be) because they control the supply!
This is why there are almost no individual speculators in grains, energy, industrial metals, etc that make money year in and year out. The banks don’t have this information advantage either, which is why they trade poorly in commodities.
That is why we trade gold and silver. Gold and silver prices are not driven by real supply and demand. Thus, commodity trading companies don’t have an information advantage in the precious metals market. Always know where your edge is.
Traditional technical analysis doesn’t work
Traditional technical analysis like stop losses, traditional patterns, breakouts/breakdowns etc don’t work because a lot of it is fake and created by commodity trading companies to trap speculators.
Commodity trading companies know where the stop losses are and know how traders think (all technical analysis traders think alike). And since commodity trading companies are so massive, they trick traders time and time again.
Historical analogues are very important
Historical analogues are very important in the gold and silver markets. Commodity trading companies have been using the same long term patterns and traps to shake out weak speculators and take profits over the past 40 years. This is why gold and silver’s historical patterns are so obvious and repetitive.
Don’t trade commodities in a secular bear market
Commodity trading companies can’t completely manipulate commodity prices in bull markets. Bull markets attract mass participation, thereby diminishing the relative size of these commodity trading companies. The same cannot be said of bear markets.
After the first cyclical bear (i.e. crash) of a secular bear market, avoid commodities. Commodities become directionless (from a long term perspective). Thus, many speculators/funds leave the commodities markets, so commodities trading companies become much bigger, relatively speaking.
With a directionless market and massive manipulators, small speculators will be trampled.
Abnormal signs are the key to understanding commodities
Although it’s impossible to know what the commodity trading companies will do (COT reports are useless), these companies inevitably leave clues for the savvy speculator to pick up on.
These companies don’t just dump their entire position at once! They sell into uptrends and buy into downtrends. Thus, savvy speculators will recognize that changes in character and abnormal signs means that these companies are shifting from bearish to bullish or vice versa. You want to be on the side of smart money, not dumb money.
There is a historical analogy
The protagonist in Reminisces of a Stock Operator “read the tape” and conducted primitive technical analysis. His tape reading allowed him to see when the corporate insiders were buying and selling. In an era when insider trading was the key to riches, the protagonist picked up on the signs left by corporate insiders and became very rich in the process.
We must do the same as savvy commodities speculators. We need to pick up on what the commodity trading companies are doing by reading the abnormal signs.
An example of how big the commodity trading companies are
E.g. Glencore in 2010 controlled more than half of the world’s zinc market and more than 1/3 of the world’s copper market.