A Melman Minute
By: Leonard Melman
July 9, 2008
It is absolutely amazing how lawmakers can fail to
learn from their past errors - and the hue and cry emanating from the U.S.
Senate and the U.S. House of Representatives for limitations on "speculators" in
the oil market sounds exactly the same as one of history's failed experiments in
the field of commodity price regulations. Our thanks go to the editorial staff
of the Wall Street Journal for detailing what we might call the "Great Onion
Fiasco" of 1958.
In that momentous year, the price of onions soared. Rather than blame the price
rise on an "act of God", or as a result of natural events, the Congress of that
era placed the blame squarely on moneyed interests at the Chicago Mercantile
Exchange and, as a consequence of their resultant righteous indignation, they
banned futures trading in onions, a ban that exists to this day. Did the ban
work? Not at all.
As the WSJ editorial puts it, "To this day, fresh onion prices still cycle
through extreme peaks and troughs. According to the USDA, the hundredweight
price stood at (all figures $US) $10.40 in October 2006 and climbed to $55.20 by
April 2007...then it crashed due to overproduction, falling to $4.22 by October
2007." Clearly, the Congress of that earlier era failed to understand the role
of speculation in financial and commodity markets. The increased liquidity
provided by numerous speculators tends to smooth out price movements, not
exaggerate them.
Referring to the current frenzy in Congress to 'punish' speculators by
eliminating them from the price structure of crude oil, the WSJ editorial
writers conclude that, "...instead of learning from its onion mistakes, the
political class seems eager to repeat them."
Our concern is simple. The onion market is so small that society can take it or
leave it, without any great consequence to anyone except growers and onion or
hamburger aficionados. However, if the price of petroleum multiplied itself by
five times over within six months, then fell by more than 90% and then
subsequently tripled - as actually occurred in the market for onions over an
eighteen month period - the chaos in the industrialized world would be
incalculable.
That is the dangerous game the American Congress is playing. They should better
study the long-term chart of crude oil. Yes, there are significant price
movements - but in general they follow well defined trends that are sustained
over considerable periods of time, thereby providing for relatively orderly
markets. Consider what these charts would look like if they followed the bizarre
movements in the price of onions once speculators were removed from the
marketplace.
All of this leads us to conclude that the risk of massive price upheavals in
petroleum is growing, and therefore, the potential for financial panic is also
increasing - a fact which should provide support for gold and silver over the
coming months and years.
Speaking of precious metals, a new crime wave is beginning to take shape. As the
price of platinum has skyrocketed to the area of $2,000 per ounce (see chart),
police reports are coming in regarding the theft of platinum from automobile
catalytic converters which contain small amounts of platinum and/or palladium.
According to an Associated Press article, "...converter thieves slip under
vehicles with battery-powered saws, sometimes in daylight, and in a matter of
minutes leave owners with shocking repair bills...Since January, 43 converter
thefts were reported in downtown Cincinnati, compared with eight during the
first half of 2007." One can only imagine what might occur if production in
South Africa were curtailed due to that nation's growing power crisis and the
price of platinum really skyrocketed!.
As of about 8:30 PDT, markets this morning show precious metals moderately
higher with gold up about $3.00, silver ahead by sixteen cents and base metals
strongly higher with the exception of copper which is still correcting following
the apparently resolution of labor problems at several South American mines.
Crude is slightly higher near $136.50 while the U.S. Dollar is moderately lower.
Financial markets are mixed with the Dow Industrials
virtually unchanged, but the TSX up by about 80 points.
We will have more on the petroleum complex situation tomorrow, particularly
noting information involving a rather ominous story coming out of Russia
regarding natural gas.
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