Chinese Commodity Financing Deals

Just wanted to point to an article that documents the very complex theory of Chinese Commodity Financing Deals (CCFD), which started in 2012.

Basically, China manipulated the paper price of gold down to create excessive physical gold demand we saw in 2013. China is the culprit and it’s my job to get this out in the media. This is the only reason how gold prices didn’t go up while physical gold demand was up. You would think when China unwinds, won’t this excessive physical demand slow down and send prices lower? The article apparently says that prices will go lower for copper and other commodities, but not for gold.

So, when China collapses and needs to unwind all of these trades, they will have to buy the paper price again which will send gold higher, back to the 2012 level. The opposite happens with the copper price, which will go lower.

Another very important conclusion is, when China collapses, then China won’t be able to do these CCFD’s anymore, which will mean that gold manipulation will end (at least from China’s perspective). This could be bullish for gold as I pointed out already in another post: “When China Implodes, This Might Be Bullish For Gold”.

I’m just summarizing that article, it’s too complex for me to understand for now.

Now what’s more important to us is: “How do we spot the unwinding of China?”. Obviously, the unwind will mean that the yuan collapses, so we look at the forex market.

You can see the collapse starting in 2014. And lo and behold, which commodity soared in 2014? Gold. Which commodity collapsed? Copper.

And with our correlation between trade and currency in mind, we know that when a currency collapses, the trade numbers will go from surplus to deficit, which means imports are higher than exports. So we also need to monitor the trade numbers of China.

Goldman Sachs says this unwinding will have a time frame of 24 months.

Copper Deficit in China

The latest contango report shows that China has a copper deficit:

CONTANGO WATCH: Copper’s almost 0.90 percent narrowing has brought its current cost in line with its historical average. The move comes on the back of a price drop of more than $50 for the November and December contracts from last week, which ranges up past $75 near the back end of the curve.
Earlier this month, Reuters reported on an expected surplus that has yet to appear. China could be the culprit.Mineweb reported that despite warehouse numbers that would indicate a current surplus, French bank Natixis believes China is actually in a copper deficit based on anecdotal evidence of Chinese destocking.
“If, as our models suggest, Chinese destocking accounted for around 300,000 tons of copper early this year, measures of consumption based on end-user demand rather than apparent demand would give us a deficit for the year if anything from 60,000 to 225,000 tonnes,” Natixis said.

 As you can see here, we have a had a huge drain in copper stock at LME, suggesting the same. So I believe the commodity market might rebound on this news.

My contango report also shows that we may have an intermediate bottom as we go into backwardation (red chart going down).

Basically, buy the commodities as Mineweb reports: 

It is difficult to know whether or not this is an accurate view. But if it proves to be so, it could result in unexpectedly higher prices for the red metal over the next few months.

Status on the CRB Index

Just recently, sentiment in the commodity market has been positive. Capacity utilization improved, the CRB index started to move upwards, chances on QE3 are improving, the dollar index moves into a top formation. In this article I will discuss the prospects in each sector of the CRB index.

On Tuesday 17 July 2012 the capacity utilization rate came in at 78.9%, up from 78.7% the previous month. As I noted here, the capacity utilization rate is a leading indicator for inflation. This inflation will start to be visible next year as there is a lag between the capacity utilization rate and commodity prices.

The different sectors in the CRB index composition are: petroleum, agriculture, metals and natural gas. I will analyse them one by one in this article.

Chart 1: CRB Index