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The cost of commodity

By Nobody following x   2011 Mar 7, 1:37am 1,365 views   1 comments   watch   nsfw   quote     share    


Lately, the price of oil is creeping up again. That seems no surprise to me, because FED decided
to dump more money about 6 month ago. Our money is actually worth less than it was a
couple of years ago. I am a business owner and thanks to the tax breaks, I am making more
than ever. At the same time, I was able to let go a few of my workers. Well, I really didn't
need them after the demand tanked. Although the demand has gone down, I am making more
money. My life style pretty much remained the same, so I have been saving more.

What did I do with the money I saved? I had my financial adviser to invest in bonds, commodity
and stocks. My investment portfolio is doing absolutely great. The return is more than 25%
annually for the last three years. At this point, I have begun wondering what was going on here.
I don't see the pick up in demand. But the profit is going up every where, thanks to tax breaks.
I am making more. Sure the price of gasoline, food, etc is going up, but my profit is way more
than the rising cost of commodity to offset my pain.

Actually, my investment is doing much better than my business. So the guys are pretty
much happy just to have a job and the free donuts. But I know some of them bought a house
more than an hour away from work, so the rising cost of gas really hurts them. Then I got to
thinking that my investment may be actually harming him. Well, more money is dumped into
the oil market, and the price of oil goes up. It is just a principle. So I am making profit off my
workers. I am not stealing from them. I am making a legitimate profit from the investment.
I am getting richer. My guys? Well, if they need to get paid more, I guess they are going to
have to look for another job. Lately, I am not sure if we are living in a country where the
opportunity is indeed equal.

1   MarkInSF   ignore (1)   2011 Mar 7, 2:10am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Lately, the price of oil is creeping up again. That seems no surprise to me, because FED decided
to dump more money about 6 month ago.

No. It's mostly because of China an other countries who's economies are booming. I've pointed this about about 17 billion times now, but oil has been risking for 10 years, and it's peak 3 years back was well before the the Fed started quantitative easing.

Well, more money is dumped into
the oil market, and the price of oil goes up. It is just a principle. So I am making profit off my
workers.

You can only make a profit with futures if the actual supply/demand changes such that the price goes up before you must close out your contract. You may think you're making a profit from people that use oil - the profit has to some from somewhere right? - but the profit actually comes from the futures counterparty - which by the time the contract is closed is an actual producer. Your profit comes out of the lower price the producer is getting for their oil.

In other words, in you buy a June contract for $80 from a producer, and the price of those contracts goes up to $90 by the settlement date (when the only ones left standing on either side of the contracts are actual producers and consumers), you make $10, and the producer loses $10 since they could be selling the oil for $90, but they already agreed to sell if for $80.

Same when you lose money is you speculate wrong. You don't make it cheaper for people that buy gas. The producer ends up getting more for their oil than they would otherwise, adding your loss to their income.

edit:And actually, a lot of the oil market futures are on fully cash settled markets. They are essentially side bet markets, where one party agrees to pay the other money if oil goes up, and the other party agrees to pay if the price goes down. So your profits are coming from somebody else who bet (or was hedging) the other way.


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