I tend to group financial instruments into character types: the plodder and the dullard, the jittery or the twitcher, the schizophrenic and the turncoat. This last pair is the one where the spots get shed often to be replaced later. Though markets in themselves are not evil, they can cost us dearly.
Our focus today is metals, where New York's Commodity Exchange (Comex) and the London Metal Exchange have seen lots of business snatched from under their noses by China's Dalian and Shanghai futures markets. Conventional wisdom holds that, "while billions of yuan have poured in from herd-like Chinese retail investors who show little regard for market fundamentals, brokers and traders say even more is coming from an expanding army of deep-pocketed hedge funds", according to a recent Bloomberg report. Tiger Shi, managing partner at brokerage BANDS Financial Ltd, says: "Western hedge funds and institutional investors don't really know what's going on." Has the shift changed price action?
We start with silver because I learnt a lesson the hard way here. Its price started rising when the US abandoned the gold standard in 1971, from $1.50 per ounce to $10.00 by 1979. The Bunker-Hunt brothers then attempted to corner the market, taking it to nearly $50.00 in 1980 - followed by a horrid reversal through to 1982 (when I started trading bullion). A decade later it was $3.50 and I thought it was too cheap. So I kept buying the dips, getting bored, missing out on better investments, and being stopped out time and time again. By 2002 I had given up on it - and then look what happened! I missed out completely because I didn't believe it could manage such a feat.
Shanghai aluminium is a more volatile beast, regularly doubling then halving in value over the past 25 years since it was listed in China where it is quoted as yuan per metric tonne; most of the time it has held between 10,000 and 22,000 yuan. Matching 2008's record low again in November 2015, it's been one of this year's best performing instruments, up 60 per cent at November's high. Many are suggesting it's gone too far because, and only because, it's up this much. Not good enough as between 2008 and 2010 it shot up to 18,000 followed by another leg up from 13,500 to 18,500 in 2011. Currently at its mean regression, be prepared.
New York copper rallied too, up a whopping 30 per cent in dollar terms since October, for a potential annualised rate of 120 per cent. Sustainable? Probably yes because the sharp rally started one standard deviation below the mean of the last decade - and therefore still cheap.
Shanghai steel rebar (reinforced concrete bars used in the construction industry) has clearly broken the downtrend channel that had dominated since 2011's high. The first leg of a new (potentially secular) rally started this year, with a second rally since summer. Onwards and upwards again next year?
