HardAssetsInvestor

Written by Amine Bouchentouf  |

July 10, 2012

The Commodity Investor: Oil & Gold Charts Look Eerily Similar To 2008’s Pre-Crash Days

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By not addressing the causes of 2008’s financial meltdown, another global economic breakdown is poised to repeat history, which has sapped investor confidence.

Oil and gold are sometimes known as the “king and queen of commodities” due to their prominent status within the commodities space. And the last time the king and queen of commodities behaved this way was right before the bankruptcy of Lehman Brothers in September 2008. The charts for both oil and gold are similarly ominous and point to a near-breakdown of the global economy.

The Commodity Investor has argued that the root events of the 2008 financial crisis have yet to be addressed and the system of checks and balances required to monitor the global financial markets is still woefully inadequate. Put simply, the issue of “too big to fail” has never been properly addressed or resolved, and that is dragging down confidence and commodities alongside it.

Poorly Regulated and Fragile Markets

Let’s consider two financial events that occurred during the last couple of months.

In May, J.P. Morgan reported that an internal investment unit revealed a series of trades that had gone horribly wrong and could cost the bank anywhere from $3 billion to $9 billion in losses. Two things are surprising about this event. First, JPMorgan has been one of the best risk managers since the 2008 Lehman bankruptcy, and has been able to navigate the financial crisis better than its peers. Indeed, it’s one of the few banks that came out of the financial crisis stronger than it entered. So the fact that the losses were of this magnitude was a surprise in and of itself.

Second, it came as a surprise to many in the market that J.P. Morgan—or any bank for that matter—was still making large bets with its internal capital (known as proprietary trading). That is at the crux of the regulation that Congress is attempting to place on financial markets.

After the 2008 financial crisis and the taxpayer-funded bank bailouts, there was a public outcry to change regulations that allowed banks to lose hundreds of billions of dollars by betting their internal capital on risky products. Enter “Dodd-Frank,” the “Volcker Rule” and other regulations to prevent banks from engaging in such high-risk activities.

Almost four years since Lehman went bust, Merrill Lynch was gobbled up by Bank of America, and Bear Stearns was bought by J.P. Morgan, the same kind of activity that led to these events is still occurring in broad daylight—case in point is J.P. Morgan’s multibillion-dollar prop trading loss.

Let’s consider a second event that cost the heads of both the chairman and the president of Barclays Capital, one of the most global financial institutions in the market. The ink wasn’t dry on the headlines describing J.P. Morgan’s historic loss when media reports began circulating that described a massive and coordinated fraud within Barclays Capital to manipulate the London Intermarket Benchmark Overnight Rate (Libor). Libor is a rate used around the world to determine loan rates for all sorts of products, from commercial mortgages to how much banks lend to each other. It’s estimated that trillions of dollars’ worth of loans are benchmarked to this rate.