SUPER CYCLE 2005 – LIU QIBING A lot has changed for Chinese copper trading since 2005, when Liu Qibing of China’s SRCSR got caught out by rising copper prices. Back then, Liu Qibing was very influential in the copper pre-market, setting the price mood before the US market opened. With copper prices reaching the previous highs of $3000/Mt, the market consensus was that copper wouldn’t hold above $3500/Mt and certainly not exceed $4000/Mt.
In addition to regular short positions, Liu Qibing traded structured products to exploit his market view, buying well below market with punitive conditions at $3k and $4k, and selling well above market with punitive conditions at $3k and $4k. If copper had remained in the $3k-$4k range, the strategy would have paid off nicely.
In the event, speculative buyers pushed copper prices above $4k where Liu Qibing’s structured short positions doubled and his structured long positions knocked out, and the rest is history.
China has grown significantly since 2005, owning three of the world’s four key copper trading venues (SHFE, INE and LME) and their manufacturing base consuming about half the world’s physical copper.
Unlike 2005, when speculative traders ran the SRCSR out of its copper short positions, don’t underestimate China’s ability to influence commodity prices now, given their statements about overpriced markets.
SUPER CYCLE OR SPONGE OF EXCESS LIQUIDITY? Aside from gold and silver, most commodities weren’t seen as an asset class by mainstream investors until about 20 years ago.
The first investor wave into LME metals was 1994-1997, after Alan Greenspan recommended commodities as a hedge against inflation. LME metals sold off in 1996, led down by copper and the Hamanaka scandal, and this sell-off was followed by a short lived rally in 1999, with “Y2K” arguments suggesting that computers switching from year 1999 to 2000 would cause global logistics problems, promising to be bullish for commodities.
With Greenspan warning of irrational exuberance in the equity market and
dot.com faltering in late 2000, he cut rates repeatedly in 2001 to successfully avert a “1989 Japan style” meltdown in the US equity markets.
Officially, US Fed policy uses rates to control inflation and unemployment, but it appears that rate cuts were used to protect US equities once equities became the mainstream vehicle for personal pension wealth in the mid- 1990s. (The Fed also cut rates in 2019, after Trump’s China trade wars caused an alarming slide in US equities).
Whilst low rates have prevented significant equity losses, they may have helped cause other problems. The aggressive rate cuts in 2001 and 2002 together with weak equity performance encouraged inventive ways to find yield. Some banks used Collateralised Debt Obligations (CDOs) to improve investor yield, spreading risk across a large number of borrowers, with risk modelling approved by the ratings agencies. In reality a lot were poor credit risks (e.g. self -certified mortgages on low starter rates, which defaulted once the starter period ended), and the resulting housing boom-bust helped triggered the financial crisis of 2008.
ARE THE CURRENT COMMODITY AND BITCOIN RALLIES MERELY TEMPORARY SYMPTOMS OF EXCESS LIQUIDITY?
Against a backdrop of weak US equities and debt markets, and China transforming into a global economic power, commodity investment really took off in 2003. Investors bought metals first, then oil, and also bought into the risk diversification and inflation hedge arguments. When the markets collapsed in 2008, all asset classes suffered and a commodities position gave no meaningful diversification benefit.
Governments and Central Banks fixed the global financial crisis of 2008 using liquidity and low rates, in Quantitative Easing (QE) programs launched in 2009 which ran for almost a decade
Unlike mainstream equities and debt, the cyclical nature of commodity prices doesn’t lend itself to long term “buy and hold” strategies adopted during 2003-2007. Investors have learnt to pick their opportunities, and tend to target commodities in years when equities and bonds look overdone.
In the last few years, commodities have also been compared to other “alternative investments”. In 2020, Bitcoin was being touted as the “new gold”, a viable long term store of wealth and a viable medium of exchange. The extreme volatility of the past few months damaged Bitcoin’s credibility as a replacement for gold, and El Salvador’s recent adoption of Bitcoin as legal tender may not be the best endorsement when seen alongside their chequered history of money laundering legislation.
Evel cleared the buses at Wembley in 1975 but landed badly, breaking his pelvis but still managing to walk out of the stadium.
Over the past 20 years, financial markets have become used to very low interest rates and access to a lot of cheap liquidity. Is 2021 the start of a commodities super cycle, circa 2003-2007, or are the current commodity and bitcoin rallies merely temporary symptoms of excess liquidity?
Rohan Ziegelaar E:
metals.desk@
admisi.com T: +44(0) 20 7716 8081
11 | ADMISI - The Ghost In The Machine | Q2 Edition 2021
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