The Hunt Brothers

The historical case of silver Thursday suggests cornering of assets is a cyclical event with probable consequences.

Cornering markets may have come off age, but even today traders dare to take large bets. How safe it is? What do historical cases suggest? Are there any signatures linked with such trades? What does numeric ranking of global portfolio suggest?

Time does not differentiate between assets. If coffee is the best in a quarter compared to 54 global assets and Zinc is the worst, it’s easy to make a cross asset case, where we go long Zinc and short Coffee. We initiate the pair today.

While we were initiating the respective pair, one of our members highlighted Anthony Ward's 658 million pound cocoa trade and how softs were under extreme buy pressure. We do understand that large volumes need conviction, experience, meteorologists, additional electricity to source data from all over the worlds and lots of money. But we also know that cornering 7 per cent of the market is a high risk bet. Now of course we have open interest positions and limits to how much of the market one can corner.

Few decades back things were a bit different when Hunt brothers that nearly cornered the silver market in 1979 swinging from high wealth to collapse in matter of months. They together had an estimated silver holding of 100 million ounces. Silver prices went from $50 to $11 in months. The largest single day drop also called now as the Silver Thursday. Nelson was fined US$10 million and banned from trading in the commodity markets.

Extrapolation and need to corner a market happens at market tops. It’s at highs when genius overtakes common sense. Coffee is the best of the 54 assets in the world and you will hear few voices crying short coffee and fewer saying short coffee, long zinc. Orpheus pairs are low risk bets based on performance cycles and extreme divergence. Now that softs are all over the news, it’s hard to hear an underperformance call on coffee.

Well cornering gold is hard, as it’s a larger market and also a market that needs more resource to comprehend demand and supply drivers. We have been more than vocal about gold underperformance. It was here we talked about ‘the gold exponential’, ‘the gold short’. We even talked about ‘Fools gold' and have been maintaining our preferred primary negativity. Gold at current prices is 16 per cent from 2008 levels and is nearing 10 per cent fall from the all time top. The prices have now broken key trendline supports and further selling pressure on gold cannot be ruled out.

Last time we made our case against gold and said, "It’s time for Gold to underperform the rest of the metals. There is no better time to reduce gold in the portfolio, or short it than when it is at the top. Gold should not only relatively underperform rest of the metals complex but also just might surprise the absolute bulls." What Happened? Long AIGI (Industrial metals), Short Gold is up 9 per cent since 9 July. And as we see things there is more to come.

To understand the ranking process more we integrated the following 55 assets in a global macro portfolio. Forex (EUR USD, AUD USD, GBP USD, CAD USD, JPY USD, CHF USD, Yuan Rnmbi, Indian rupee, NZD USD), Energy (Crude, Natural Gas, Gasoline, Heating Oil, Petroleum, Carbon Emissions, Brent, WTM, Energy Index), Metals (Precious Metals, Tin, Zinc, Nickel, Copper, Platinum, Silver, Industrial Metals Index, Gold), Agro (Coffee, Corn, Grains, Livestock, Sugar, Wheat, Soybeans, Cotton), Thematic and Global Equity (Coal Mining Fund, Shipping Fund, Dow Industrials, Sense, Agricultural Equity, Water, Nuclear, Russell 2000, Russell 1000 USD), Bonds (US 30, US 5Y, US 10Y, US 2Y, INR Bond Index, China Bond Index, Australian Bond Fund, Global Bond Index, Sweden Bond Index).

Our latest update on Alpha Global also carries a global energy ranking update. Crude and Brent are the worst of the energy assets and natural gas is the best among energy assets. Guess what? Brent was reeling at the bottom of the rankings. This suggested the prices for crude and Brent could have already bottomed or might have marginal negativity left. The way it seems Oil is not far from a bottom. We won’t be surprised if Oil starts moving up before the end of the current quarter i.e. another few weeks. We have an Oil target of dollar 60. Whether these targets are attained or not remains to be seen, the numeric ranking low on Brent has already made its verdict. Oil is bottoming in the next few weeks.

Summing it up, it is indeed performance cyclicality is a sharp predictive model, short gold and long Oil should be an interesting pair for weeks ahead. This should be the time for the prototypical hunt brother cornering of the oil markets. It’s a pity you find hunt brothers and Ward’s at primary multi month highs not at primary multi month low opportunities.

Email the writer: