Philippine Mining Index and the Manipulated Collapse of Commodity Prices

We're living in an amazing world where real assets can be purchased with fantasy money. It won't last because it's illogical and synthetic. But it has already lasted longer than most realists thought possible.-Richard Russell

The Phisix finally took a breather, falling by 2.33% over the week, the first decline over 7 weeks. Such loss substantially reduced the year to date gains to only .43%.

The decline had been broad based, but ironically the mining and oil sector eluded the downturn supposedly on a raft of speculations over prospective deals.

I say ironic because such defiance comes in the face of a manipulated collapse of commodity prices in the world markets.

The Manipulated Collapse

Abruptly changing the rules of the game represents manipulation.

Since trades are essentially anchored upon expectations based on existing information which incorporates rules and other operating parameters (e.g. architecture of trading platform), drastically altering the rules midway dramatically shifts the balance of cost-benefit expectations and the economic distribution of resources, as manipulation benefits the regulators and their allies at the expense of market participants.

While I expected the huge run up in silver prices to be met with sharp price volatility[1], I didn’t expect that this would be prompted for by a series of steep credit margin hikes imposed by the CME[2]. Silver prices fell 25% over the week.

Since commodity markets are interrelated, as many investors or institutions position in different commodities or commodity indices, the assault on the silver markets rippled throughout the commodity sphere and to other markets.

One evidence of such imbalance is that even as silver prices collapsed, the physical inventory of silver shriveled[3], instead of ballooning. This means that instead of a panic from a sharp price downswing, many have taken the price drop as an opportunity to accumulate physical silver! What appears to be happening is that the heavily leveraged positions or those who fail to meet the margin calls, have forcibly been closed regardless of price, but the new entrants have used such opportunity to accumulate substantially.

If this should serve as a clue then the interventions mean that the effect on silver prices is likely to be transitory as players adjust to the new environment.

The other point is that the fundamental drivers of silver and other commodities remain firmly entrenched.

Commodity Prices Underpin the Fate of Mining and Resource Firms

Changing the rules midway was part of the scenario of the silver bubble meltdown in 1980. The Hunt brothers, whom attempted to corner the silver market, suffered from the same credit margin hikes which led to their bankruptcy.

But of course, the major factors that led to the commodity bubble bust had been due to sharp increases in the interest rates, coming from a shift in the monetary policy stance by US Paul Volcker led US Federal Reserve, and that a global commodity glut had accrued as the globalization gradually took hold[4].

Except for the manipulation, the above events hasn’t shaped the de facto climate.

Why is this important? Because share prices of mining or other commodity based companies essentially depend on the prices of the commodity products.

The almost two decade of bear market in commodities led to the hibernation of mining and other resource based companies or a slump in terms of stock market prices.

Remember Atlas Consolidated at php 400 per share in the 70s and was seen as a ‘blue chip’? Today, Atlas trades at a measly php 15 per share following years of dormancy in the company’s operations. To consider, real or inflation adjusted prices in the 70s means a lot more Pesos today.

As one would note, the CRB Reuters futures index (lower window) courtesy of chartrus.com[5] squares with the performance of the Philippine Mining Index (upper window).

When I turned bullish on gold in 2003 I called this the “Rip Van Winkle”[6] moment. The concurrent rise of the CRB Reuters index also reflects on the Philippine Mining Index.

The point is that the buoyancy of domestic mining and oil index (or prices of mining and oil companies) greatly depends on the underlying trends of their commodity products.

Commodities As Hedge

The war against precious metals is being waged most possibly as part of the signaling channel tools which Central Banks employ to manage inflation expectations. This I think is part of the orchestrated conditioning employed by the US Federal Reserve that is being used to justify further interventions particularly the QE 3.0[7].

All talks about tightening and the ending of QE part of another series of poker bluff at work.

Given the weak housing market (which risks endangering the balance sheets of the US banking system which Fed chair Bernanke sees as the heart of the US economy), the declining interests of foreign governments to finance US deficits, insufficient private savings and the wobbly financial conditions of states[8], plus the ideological economic (quasi boom) biases and path dependency of the policymaking by US political authorities, the US is left with little option but to reengage in quantitative easing sometime in the near future after the end of the QE 2.0 in June.

And part of the propaganda, through biased research studies by the Fed and allied institutions, has been to delink the Fed’s policies with that of surging commodity prices. And the other way to create this impression is to manipulate the commodity markets.

At the end of the day commodities still represents as insurance from the adverse unintended consequences of the monetary interventionism—an addiction inspired by grand delusions of power.

To quote Michael Taylor[9],

the state exacerbates the conditions which are supposed to make it necessary. We might say that the state is like an addictive drug: the more of it we have, the more we 'need' it and the more we come to 'depend' on it.

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[1] See Hi Ho Silver!, April 23, 2011

[2] See War on Precious Metals Continues: Silver Margins Raised 5 times in 2 weeks!, May 5, 2011

[3] See War Against Precious Metals: Silver’s Collapsing Prices in the face of Collapsing Inventories, May 6, 2011

[4] See War on Precious Metals: Silver Prices Plunge On Higher Credit Margins, May 2, 2011

[5] Chartrus.com CRB Reuters Futures

[6] See Philippine Mining Index; We’ve Only Just Begun! April 10, 2006

[7] See War on Precious Metals: The Rationalization Process For QE 3.0, May 7, 2011

[8] See The US Dollar’s Dependence On Quantitative Easing, March 20, 2011

[9] Taylor, Michael The Possibility of Cooperation (Cambridge: Cambridge University Press, 1987), p. 168 Quotes.liberty-tree.ca