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ATTENTION:'s Daniel Dicker on Commodity Inflation, Middle East Unrest

ATTENTION:'s Daniel Dicker on Commodity Inflation, Middle East Unrest

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Dan Dicker on the line, Senior Contributor at

Dan, you recently penned an article on How to Cash in on Commodity Inflation. In the article, you mentioned a plethora of new products, ETFs, ETNs, managed futures funds, index funds, giving investors a way to cash in on rising commodity prices. But you note they are all long-only funds. Doesn't that facilitate a certain market imbalance?

Daniel Dicker: Of course! Look, I have a book coming out in a month and a half from John Wiley called Oil's Endless Bid where I focus on the oil markets, because that is where I did my trading for 25 years, where clearly there has been this enormous increase in access to commodities that didn't even exist just five years ago. That kind of access is allowing both commercial traders as well as individuals to bet on the prices of commodities in the way that they've been betting on the prices of stocks and bonds.

There has been a definite imbalance. It causes, if nothing else, an increased price for almost all commodities out there. What it definitely causes are these enormous speculative spikes, this kind of volatility that we've seen, this up-and-down ride in prices, not just in oil but in grains this year, and that as we've seen has been incredibly destabilizing to many of these third-world and emerging nations. We're seeing that playing out today in Egypt, Algeria, Saudi Arabia, Yemen, and who knows where else is next, Jordan, this is what's going on right now.

With all of these long-only funds, if that's the case, how do we avoid a bubble in food prices and commodities going forward?

Daniel Dicker: I don't think you can, in fact, and I think that's part of the issue. The issue is not necessarily whether the prices are ultimately true or fair or honest, but whether they create this kind of mass ingress and egress of capital, which is in fact the definition of bubbling. I think we've seen it once before.

We saw it in 2008 with oil and to a certain degree with corn, and this year we're seeing it in a whole wealth of things. Cotton is up 150% in the last 12 months alone. Coffee has doubled. Corn and wheat are close to having doubled. You've got a lot of this increased volatility and high, shooting prices that inevitably leads to a crash, and you're going to get them in all of these commodities.

In your article you go on to write that speculative forces have quite simply swamped the small and delicate commodity markets that have never been designed to accept this kind of investment and trading interest, and you say that the total amount of money in these funds now is up to $350 billion.

Daniel Dicker: I go through this in very deep detail in my book, but in essence if you want to buy a stock from somebody, you have to buy it from somebody who already owns a share of stock.

In a commodity market, this is not the case. For every buyer, you need to have an active seller, so for every long you need to have an active short. Now that's a major difference between asset markets. The second thing is that in essence the people who are engaged in these markets are those physical players who needed to be necessarily short and long.

What has happened instead is you have a whole bunch of financial players, none of whom have any desire ever to be short. What they do is they come in and they buy a whole bunch of these paper assets that represent physical deliveries at some point, where in fact you have to scare up another side of the equation. You have to scare up the financial side to sell these contracts on the other side. Now in these markets, they're not as well developed and they're not nearly as old as the equity markets that we rely upon as stock markets.

Let's take oil for example. At the NYMEX, you have about a million three or a million four open contracts at any given time. If you take just an overall number of like a $100 barrel of oil for the current price, let's say the whole strip is close to $100. It's not quite there yet but let's say it is. So if you have a million three contracts at $100 you basically have a $130 billion dollars of market cap in the entire West Texas Intermediate Futures market. Remember, this is the benchmark for oil around the world. So you have $130 billion, but in fact, $130 billion is not a whole lot of money when you're thinking about something like an already mature market like Exxon Mobil (NYSE: XOM), which has a market cap of $400 billion.

So the entire market for future oil is less than a third of what the market cap of one integrated oil company is. Now this is how small and delicate these oil markets are. In fact, when you throw the kind of index money, ETF money, ETN money, ETV money, managed futures money, if you're able to open your own individual futures account and everybody is buying this stuff and they're throwing all this money at what is, in essence, a very small market space, you're going to have, at the very least, very large swings, and they're going to happen very, very quickly, and they're going to create these up-down kinds of bubble moves.

You point out that wheat, corn, cotton, and coffee are leading the charge with just incredible price appreciation over the last year or so. We've seen rice jump 11% since the beginning of the week. Is it time for rice to finally catch up with the others?

Daniel Dicker: Yeah. Rice has been one of those that have just begun to catch the whirlwind of stockpiling, of hoarding, in some of these third-world and emerging nations that are caught up in this panic between rising commodity prices and their hopes of keeping their own endemic populations from not running out into the streets and lighting trucks on fire.

In essence, what is going on in Egypt looks political on the cameras, but a large piece of the wrath that is pouring out from the Arab street is pouring out because of the increase in the price of bread. You wouldn't see this kind of violence, this kind of rage, in spite of the fact that it's obviously a very repressive regime in Egypt, if we hadn't had these kinds of enormous price increases over the last year.

In rice in particular, you have these third-world nations, particularly Indonesia, Bangladesh, who have tripled their stockpiling in rice, which, from the physical side, continues to drive the price up. So you have a real, physical hoarding going on in rice that is coupled with a speculative play of people who see this happening and want to get in on the bandwagon and make some money on the increasing prices there and it creates, again, a very one-sided whirlwind of price motion upward.

Going back to the Middle East for a minute, we've seen Tunisia and Egypt have been in the headlines for the last couple of weeks or so, the governments of Lebanon and Jordan have fallen, it looks like Syria and Yemen are poised to follow suit. Do you think we could see this spread to the Gulf, or do you think the governments there can subsidize food prices to the point where we may not see the same sort of uprising?

Daniel Dicker: It's an excellent question. Look, I'm a commodities trader and not a political analyst, but I would say what you do have is nations that have enormous poverty, where the wages of the average worker in some of these nations go overwhelmingly for food, in order to survive, and in those nations they're going to be the most ripe for seeing these kinds of outbreaks of insurrection, or revolution, of talk of throwing out a government.

The people in these nations, and in this nation in a lot of ways too, don't really appreciate how much the financial markets have been engaged in what's been going on in the commodity markets. To a certain degree, they're going to lash out at what they see. That is, their president, their regime, their parliament, and the things that look like they're responsible for these things. I think those are the places where you'll have the most threat of these kinds of things bleeding from spot to spot.

You prefer agricultural stocks as opposed to these funds that we've been talking about in terms of cashing in on these commodities prices, correct?

Daniel Dicker: Yes. For the retail investor, they're much more appropriate. A lot of the ETNs and ETFs can have difficulties in terms of fund fees, role characteristics, when they approach the futures market and when they get out, and they can be real profit killers if you're not accustomed to dealing with them and don't know their pitfalls. You can lose more money than it's worth in terms of investing in them.

What I prefer to have people do is invest in those stocks that proxy, or in some ways, mirror, the price motion of some of these underlying commodities.

You mentioned you have a book coming out?

Daniel Dicker: The book is on oil, which is very much about speculative influences in oil: how it started, where it comes from, what causes it, where it goes, and then at the end of the book, I tend to give some suggestions and ideas on how to fix the problems.

When should we be looking out for that?

Daniel Dicker: That one's coming out in the second week of April from John Wiley & Sons, and the name of it is Oil's Endless Bid. You can preorder it on Amazon if you're so inclined and want to be one of the first to get a copy.

What else are you working on right now?

Daniel Dicker: Always staying engaged in the commodity markets and keeping trading. I'm not just talking about this stuff from flat-footed areas, but am engaged directly.


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Posted-In: Benzinga Podcast Commodity Inflation Daniel Dicker Middle East The StreetMovers & Shakers General