From Volume 5, Issue Number 7 of EIR Online, Published Feb. 14, 2006

World Economic News

Commodity Prices Rise Again, Buoyed by Hedge Funds

Commodity market sources consulted by EIR Feb. 9, as well as financial press accounts, offer a number of very different hypotheses on why zooming commodity prices suddenly hit a 24-hour plunge on Feb. 7-8; but their accounts agree one one thing: Hedge-fund speculation is driving all these commodity markets, and is set to continue driving them upward at the current rates of 80-100% a year, or more. Lyndon LaRouche's Riemannian shock-wave model of hyperinflation, published with sketches and his explanation in the EIR of Sept. 30, 2005, stressed that hedge-fund-driven hyperinflation was approaching Weimar 1923 levels.

On the London Metals Exchange Feb. 9, the price of gold rose nearly 3%; of copper, 1%; aluminum rose 2.1%; zinc, 1.8%; lead, 3.7%; tin, 1.7%; and nickel, 2.5%. This kind of daily increases have been typical of the four months since LaRouche's "shock wave" memorandum.

Standard Bank of London issued a report on Feb. 7 which estimated, and no doubt underestimated: "Hedge fund and equity fund investments in commodities will rise almost 50%, to $120 billion this year [2006]."

In another commodity area, the Washington Post on Feb. 9 reported on a big, hedge-fund-driven bubble in sugar futures internationally, speculating on sugar's use in ethanol fuel production. In Brazil, fuel use now constitutes the majority of sugar consumption. But the Brazilian workforce is now reaping the whirlwind of this sugar "boom." In January, the price of ethanol, used as gasoline, rose by 10% in Brazil, driving the CPI up 0.6% for the month.

Expect Big Losses on Metal Derivatives Contracts

Although skyrocketing metals prices have led to fabulous profits for mining companies, analysts anticipate "a growing list of companies reporting large trading losses on metal derivatives contracts," according to the Financial Times Feb. 8. The apparent cause of the derivatives losses are that traders are making less on those one- to two-year-old contracts coming due this year and next, than they could at current prices. This is further feeding the metals price rise: The Times reports a rumor that a Mideast aluminum producer "had been locked into selling at prices lower than the prevailing market price through derivative contracts," and prices rose on speculation that the producer would have to buy aluminum to meet its commitments. (Producers in the region deny having incurred losses from derivatives, the Times says.) A broker is quoted, "The market is behaving in a way that would suggest someone out there has large losses in the aluminum market. It is surprising that there are not more trading losses." The article concludes with a discussion on mining companies now being reluctant to enter long-term programs, for fear of missing out on future price gains.

Bank of Japan To Maintain 'Ultra-Loose' Money Policy

The Japanese yen rose sharply on Feb. 8 on speculation that the Bank of Japan would announce it would abandon its "ultra-loose monetary policy"; however, the bank determined on Feb. 9 to maintain the policy after all.

That's the theory issued by the Financial Times on Feb. 8 for the yen's rise, though it reports other theories, including unwinding of short positions in the yen. A column in the FT's Feb. 9 edition attributes the previous day's commodities sell-off as paired with the yen's rise, rooted in the yen "carry trade." After describing the carry-trade and the rise of the gold price in yen, the paper says, "The result was that some big short positions developed in the yen while many speculators were betting on continued commodity price rises. When either trade looked like [it was] faltering, investors cut their positions on both sides. So the Feb. 7 yen decline was accompanied by a general sell-off of commodities—and it might have been the commodity price decline that led the yen higher."

All that said, on Feb. 9, at the end of a two-day meeting, the Bank of Japan board voted 7-2, to maintain its liquidity target in the range of 30-35 trillion yen, but to allow the amount to drop below the range when "market conditions warrant." The 30-35-trillion-yen figure is the target for the outstanding balance of current account deposits held by private financial institutions at the central bank. This decision means, according to several reports, that at present, the Bank of Japan will make no fundamental change in its zero-interest-rate policy.

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