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Thursday, February 4, 2010

Commodities Trading and Futures Speculation (Series): Collective Crowd Wisdom (VIDEO)

"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow citizens." - Adam Smith, The Wealth of Nations

This vlog entry is a continuation in a series of videos, the "Commodities Trading and Futures Speculation", and is continued from the previous entries.

Introduction: I discussed some of the myths regarding commodities speculation, and introduce the entire series.

The Reason for the Markets Existence: We discussed that the commodity futures markets exist, to allow companies, farmers, and others involved in production within the economy to hedge themselves against catastrophic losses. This in turn, keeps unemployment lower, and reduces volatility in the economy.

Why Traders Trade Commodities: Ok, if the commercial interests use the commodity markets to protect their business profits, then why are traders in those future markets? We discussed liquidity, and that the commercial interests need that trader liquidity, in order to hedge more efficiently. Without traders, the commercial interests have a very difficult time operating in the markets.

So what is the other benefits exist, other than that of traders providing liquidity? We discuss that in the following vlog entry ...

(Video Included. If you're seeing this entry elsewhere and cannot see the Video? Click here to view the entry ...)



It still blows me away, that in the west, even among Americans, I have to explain these concepts !!

But in 2007, when ones wanted to "demonize" traders and there was talk of 'abolishing' the regulated oil market as it existed - then what was the inevitable result? Large firms started leasing oil tankers, to store oil.

That is forcing traders to the spot market. Then, firms ARE manipulating the price of oil, because they have partial control over some supply, and inflationary and deflationary pressures begin to build in the price structure. This is why the markets are setup in the manner that they are, so that traders are not in the spot market. It maximizes the benefits that speculation brings to the table ... namely ... fair and liquid price arbitration given the economic fundamentals; while simultaneously negating the inflationary and deflationary side effects to some degree.

We will continue with this series, with a discussion of contract specifications ...

Edit: As a side note, if anyone was following the tweet feed today, Anthony Davian and I freaking crushed it by being short on Gold, and I was also short on the e-mini S&P 500. I didn't get a chance to go long the U.S. Dollar Index specifically, but was telling subs this morning that it was also a possible long ...

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Note: This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have over 13 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders who should make their own decisions based off their own research, and tolerance for risk.


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