Is this a pullback or something larger?

IN JUST a few days, the shakedown in the global commodities market has called into question the government’s budget forecasts, a set of numbers struck only a few weeks ago, before the rout, and delivered on Tuesday evening.

True, bulk commodities dominate official reckonings of the nation’s output. Their prices lag the spot markets. Still, the volatility in base metals this month has been extreme.

With the price of copper at a five-month nadir on Thursday, the silver price butchered 28 per cent in two weeks and a couple of hedge funds teetering, the question is: is this flushing out of commodity speculators just another pullback – or something larger?

Since the government’s mid-year economic and fiscal review last November there has been a $10 billion blowout in next year’s deficit. And the forecast of a $73 billion rise in government revenue to slot us back into surplus by 2012-13 must be looking a tad ancient if we near the top.

Which brings us to a ”warehouse financing” scam in China, which appears to be forcing speculators to liquidate their real estate and commodities positions. Behind the scenes, Beijing is furious with the speculators.

The scam involves speculators getting loans to buy base metals. Instead, they buy land, then sell it before they have to settle on the commodity purchase.

It works like this: You’re a property developer in China. You’re already over your gearing limits and can’t get more finance in China, or borrow offshore either. So you use trade credit finance to fund your real estate deal. An associate then buys a stake to give you cash to pay for your copper.

Later, the loan is repaid with the development proceeds.

There are two problems with this: one, it’s fraud, and two, it only works when markets are liquid and going up.

Property prices in China have held up lately but volumes are down. And metals prices have taken a shellacking. Deservedly, too.

AMONG all the commodities, the wildest ride has been had in silver. And it is the state of the silver market that speaks loudly on speculation vis-a-vis reality. The gold rally has been understandable.

As the US economy groans under a leviathan debt load and Washington keeps recklessly flogging Treasury bonds to New York to expand the money supply, gold is a terrific hedge against inflation.

But until it was blown away this month, the silver price had somehow managed to outpace gold. Here was the definitive speculator’s metal in its biggest shakedown since the Hunt brothers famously tried to corner the silver market. One of the brothers, Bunker Hunt, made his fortune drilling for oil in Libya but ramped up his activities in the silver market after Muammar Gaddafi nationalised the Libyan oil wells in the early 1970s.

Bunker and Herbert Hunt then began amassing a silver stockpile, taking the price from $US1.50 an ounce to $US50 an ounce in 1979 when COMEX shut the market down and changed the rules on them.

Bunker was famous for saying ”put all your chips on the table”. Silver soon collapsed back to $10 an ounce.

It seems a few speculators lumped all their chips on the table again in the silver market earlier this month when the poor man’s gold touched $50 an ounce again, only to get thumped back down to $32.30 this week. Silver led the carnage in commodities, just like the most speculative stock when a sharemarket bubble is pricked.