To be a gnome

COMMODITIES JOHN CAVILL

London commodity markets have now sim- mered back to normal: that normality being the state where prices are influenced by war (or rather hopes of peace) in Vietnam, strikes in Chile, hectares in Russia and black-pod fungus in Ghana, rather than by a blind panic over currencies—notably sterling.

While the French phobia about the un- reliability of paper money as a store of wealth can be satisfied by a kilo bar under the floor- boards, any Englishman wishing to turn gnome in his small way has to do so less directly. His risk is greater, too, in that there can be no assumed floor price for commodities; con- versely his hedging can be more profitable if things go right and he has put up only the 10 per cent margin normally required by a commodity broker.

The English seem to be catching on to this— and on to the general quick-money appeal of commodity speculating even when there is no sterling crisis. This shows up if one makes an arbitrary comparison between business done in the most popular commodities on the last trading day before the last two currency crises. On the last trading day before devalua- tion the value of turnover in nine commodities was just over £13 million. When 20 November dawned not a few people found themselves computing sizeable capital gains; others who sold short on the strength of the former Chan- cellor's words (and, incredibly, some claimed patriotism was the motive) hastily scrambled to cover their sales—and by so doing added to the profits of those who were long.

By 16 March, with the reserve currencies again under pressure, a few more people seemed to have caught on to the idea. Turn- over, excluding silver, which had come on to the London Metal Exchange meanwhile, was worth well over £17 million on paper on the last trading day before the Washington talks produced the two-tier gold market.

Despite devaluation this was a real increase because copper apart—where nine months of strike in America and the resulting loss of 20 per cent of non-communist world produc- tion were the factors—most commodities had lost their 161 per cent lift since November, simply on considerations of supply and demand. Even so the small speculators' interest in com- modities remains puny: the £17 million turn- over notched up while the flight from currency was at its height was less than half the average daily figure for equities on the London Stock Exchange during the relatively quiet month of February. London, too, differs from New York in that the bulk of commodity trading is done by bona fide consumers, or middlemen, who hedge against price falls by purchases of actual cocoa, coffee, sugar, copper and so on by sell- ing forward; or if selling, buy forward in case prices rise.

In New York between 50 and 65 per cent of turnover in commodity futures is accounted for by private speculators using specialist brokers as well as the 'thundering herd' and other big general brokerage firms—most of whom trade in London. Here the small speculator is responsible for between 20 and 25 per cent, and of this a considerable amount comes from continental operators.

The dual factors of ignorance and fear seem to be mainly responsible for this situation. It is not only wives who respond with the hoary joke: 'But where will we put fifty tons of cocoa—in the drawing-room?' Those who are au fait with futures are also well aware that dealing in them can be an all-or-nothing gamble. Dealing in commodity futures is not an attractive proposition if you have to finance a ton of copper at £500 in the hope of a 10 per cent price rise; putting up only 10 per cent deposit gives a much more satisfactory profit on capital invested but the corollary is that a downward twitch in prices and perhaps a broker who cannot see his way to carrying his client, means the lot has been lost.

Much is being done to dispel both factors by studious attention to clients and their cir- cumstances on the part of brokers. Few brokers or commission houses dealing mainly for private speculators will now allow clients to lose their shirts simply because they forgot to put in a selling order in time.

Clients are not encouraged to put life savings into sugar or coffee and some brokers require assurance that the money is available to 'play with'—even though publicly they decry the idea that Plantation House or the London Metal Exchange are glorified casinos—and will always empha.sise that the commodity markets are not for widows and orphans.

Traditionally the small speculator with £1,000 to cover margins has shown a pre- dilection for cocoa, sugar and, in a smaller way, coffee. All three are now quiet markets.

The cocoa season is over and with the major crops in and the size of the shortfall in world supply-demand known, there is little in the way of sensational news to expect until the 1968-69 guessing game about West African weather, fungus and tree yields starts in August. Coffee is a bore, unless currencies are again threat- ened. There is too much available and the market is mainly left to the consumers. Rubber, despite efforts by the Malaysian government to stern world price erosion, offers price fluc- tuations too small to cover brokerage.

Among the metals, copper, where the £200- a-ton fall after the American strike ended and President Johnson turned dove on Vietnam left speculators licking their wounds, is dangerously volatile even now. It is clear that

a balance between consumption and produc-

tion is not yet in sight and the price remains shaky. What looks attractive? Well, sugar

should be watched carefully: second hand sellers have kept the market weak, but when the price starts to move up, it could go far. And there is a case for selling copper short; but this is strictly for the reckless.