Posts Tagged ‘trading’


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Widowmaker’ Oil Trade Lives Up to Its Name

OIL COMMODITIES MARKETS ECONOMY INTEREST RATES INFLATION FUEL PRICES GASOLINE FUTURES NYSE FTSE
CNBC.com
| 12 May 2011 | 03:10 AM ET
Big oil traders who bet on a rise in gasoline prices relative to heating oil ahead of the summer driving season may have thought they broke the curse of a “widowmaker” trade even as oil prices crashed.
They were dead wrong. Some of the traders who shun the big, directional bets that hedge funds love have crowded into a common springtime trade: betting gasoline futures on the New York Mercantile Exchange (NYMEX) will hold at a premium to heating oil futures as consumption accelerates into the summer.
They have been counting their winnings since March, when the spread staged its biggest seasonal rise since 2007.
The surge accelerated earlier this week as the Mississippi River swelled, threatening refinery operations in Louisiana and Tennesse.
But then came Wednesday, when gasoline futures collapsed in the biggest absolute drop in more than two years.
The spread dropped by over 17 cents, the biggest one-day move since September 2009.
“There will be widows. Some people got pretty whipsawed. But that trade is not for the faint of heart,” said Stephen Schork, editor of the Schork Report.
Indeed, lately it’s been a stomach-churning ride. The spread has moved by more than 6 cents in either direction in four of the past eight trading sessions; prior to last week it moved by such a margin only nine times in two years.
First, the U.S. Energy Information Administration came out with data showing an unexpected build in gasoline stocks as the threat level for refineries from the Mississippi river abated.
This, coupled with mounting concerns that gasoline pump prices near the critical $4 a gallon level will cause U.S. consumers to balk, pushed many bulls to the exit.
RBOB gasoline at one point slumped by over 30 cents or 8.95 percent.
The price drop was so big it triggered a five-minute trading halt in all three oil major contracts for the first time since Sept. 22, 2008.
Victims
The “widowmaker” trade tends to be popular among trading houses and hedge funds which house some of the biggest speculative traders in the market.
One victim is said to have lost $500 million on a single bet in the summer of 2008 when gasoline failed to reach a premium to heating oil, contrary to the usual pattern.
On Wednesday, traders said a big Europe-based oil trading company was forced to stop out, or reverse its long position on gasoline to prevent further losses.
Volumes spiked to the highest level in hitory as dealers rushed to place orders.
“If you were long you were happy this time yesterday and you’re probably not so happy now,” said an oil trader with a European bank. “The flood story freaked everyone out. The market attracted tourists and then we overshot.”
U.S. refineries, which ramped up their gasoline production by 111,000 barrels-per-day last week, according to the EIA, are also set to take a hit if the slump in the futures market is carried to spot markets over the coming few days.
The price crash in theory wiped off more than $5 in profits for every barrel of crude processed into gasoline.
Traders who sensed that the price may have been reaching a peak were relieved on Wednesday to have sold near the top.
The signs were already there. Gasoline demand has been on a continuous slump since the second week of April according to EIA’s 4-week average gasoline supply data.
“Luckily, I sold this morning. I’m too scared to watch it,” said a gasoline trader with a bank.
Before Wednesday’s crash, gasoline was trading at a record premium to heating oil, according to Reuters data going back to 2008.
Others saw the plunge as symptomatic of a new oil trading environment, characterized by huge price swings following last week’s record drop in oil prices, for no obvious reason.
In percentage terms gasoline price fell by less than crude in last week’s price crash, but on Wednesday they led the whole complex lower, analysts said.
“Last week’s steep slide has increased volatility in the market, and we are still responding skittishly to that.
Often in the period after a crash like that things become a little more volatile,” said Gene McGillian, analyst at Tradition Energy.
Flagship commodity fund Astenbeck II run by top Phibro trader Andrew Hall was one name that suffered a double-digit loss last week as oil prices tumbled.

commodities – ‘Widowmaker’ Oil Trade Lives Up to Its Name – CNBC

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Glencore lists fraud, criminal case among IPO risks

On Wednesday May 4, 2011, 1:23 pm

By Clara Ferreira-Marques and Quentin Webb

LONDON (Reuters) – Commodity trader Glencore, set to list this month in one of London’s largest-ever offerings, has detailed its involvement in a Belgian criminal probe as it outlines risks to investors, including fraud and corruption.

Glencore said in a prospectus on Wednesday, ahead of its planned $11 billion listing, that its subsidiary Glencore Grain Rotterdam, a former employee and a current employee had been charged in a criminal case in Belgium.

Glencore said the criminal investigation was probing a public official, the European Commission’s Directorate General for Agriculture and others for “violation of professional secrecy, corruption of an international civil servant and criminal conspiracy.”

Glencore’s unit and its current and former employees have been charged with having committed corruption in exchange for information on European export subsidies, it added.

The case was initiated in 2003, with co-operation from Dutch and French police, and covers facts dating from 1999 to 2003.

Commission agriculture spokesman Roger Waite confirmed that the EU executive expected a trial into alleged corruption by former agriculture department official Karel Brus.

Brus, a Dutch national, is accused of having passed confidential information relating to EU export subsidy application decisions to a French farming lobbyist between 1999 and 2003.

“As far as the Commission is concerned, we cannot comment further on an ongoing investigation,” Waite said.

Glencore declined to comment on the case beyond details included in the prospectus. It says it is not involved in legal proceedings which could have a material impact on its profits.

Belgium’s federal prosecutor confirmed on Wednesday that there is a criminal case against Glencore but declined to comment further. The case will be heard in Brussels on May 12.

The Commission, the European Union’s executive arm, has become a civil party to the case, Glencore said.

FRAUD RISK

Glencore also listed in its prospectus over 30 other risks to the broader company, its marketing and trading operations.

The formerly publicity-averse trader and miner operates around the world and says its willingness to move into riskier countries in Eastern Europe, Central Africa and South America before rivals gives it a “first-mover advantage.”

Companies typically outline a vast number of risks to future performance in the run-up to a listing, in order to satisfy requirements to provide a full picture for future investors.

Glencore, however, detailed more than many, with risks including declines in demand for commodities, geopolitical risk and the risk it may not be able to retain key employees.

It also raised the risk of fraud and corruption, “both internally and externally.”

“Glencore’s marketing operations are large in scale, which may make fraudulent or accidental transactions difficult to detect. In addition, some of Glencore’s industrial activities are located in countries where corruption is generally understood to exist,” the company said.

Glencore said it has internal controls, external due diligence and compliance policies.

(Additional reporting by Ben Deighton and Charlie Dunmore in Brussels; Editing by Alexander Smith and Mike Nesbit)


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Glencore has bigger risk appetite than Wall St banks

By Javier Blas in London

Published: May 2 2011 22:35 | Last updated: May 2 2011 22:35

Glencore’s appetite for risk in commodities trading is bigger than that of leading Wall Street banks, according to information released by the banks underwriting the trading house’s multibillion-dollar flotation.

The banks’ reports in advance of Glencore’s initial public offering shed new light on the financial activities of the world’s largest commodities traders. Glencore’s risk appetite will be an important factor for investors weighing this month’s offering in London and Hong Kong.

The research reveals that Glencore could have lost a daily $42.5m last year on average when measured by the so-called “value-at-risk” measure, much more than the average $25.7m put at risk each day in 2010 in commodities trading by Goldman Sachs, Morgan Stanley, Barclays Capital and JPMorgan.

The four banks are the largest commodities dealers by revenues in the financial sector.

Daily value-at-risk (VAR) is a common industry yardstick used to measure potential losses. The gauge has its critics, as it measures potential losses on regular trading days, but does not capture unusual trading situations such as during a war or in a crisis.

Glencore told the nine banks behind its IPO syndicate that it had a $100m limit on VAR, but added that it had not exceeded that limit since at least January 2008.

The trading house’s VAR fell to $26.4m in 2009 after peaking in 2008 at $50.1m.

The higher risk-taking by Glencore is partly explained by the physical nature of its business, which makes price hedging difficult.

For example, it trades a large amount of Russian oil, but hedging instruments such as Brent and West Texas Intermediate futures reflect the cost of crude in Europe and the US.

The physical nature of the trading implies that Glencore’s VAR starts from a base of about $25m-$30m, according to people familiar with the trading house.

But the higher figure also reflects the fact that Glencore does speculate in the market from time to time.

“Price exposures are normally hedged,” Ephrem Ravi, lead analyst on Morgan Stanley’s report, wrote in a note for investors.

He added: “Nevertheless, the company sometimes engages in deliberate price exposures to leverage on the insight it has into certain commodity markets.”

Olivia Ker, lead analyst for UBS, cautioned that, although Glencore had a limit of $100m for its daily VAR, the company had not explained how it responded when it sustained a loss.

“If it is in the habit of reducing risk after a loss, then we can be confident that risk is well controlled,” Ms Ker wrote. “But, if Glencore is in the habit of sticking with exposure after a loss to back the original trade, then the risks are that larger losses may accrue over a period of days.”

The Swiss-based company is aiming to sell a stake of 15-20 per cent, worth up to $12.1bn.

The company is set to issue its prospectus, providing detailed information about its activities, later this week.

FT.com / Commodities – Glencore has bigger risk appetite than Wall St banks

The MasterMetals Blog


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Gold falls, silver drops 4 pct after bin Laden death

NEW YORK (Reuters) – Gold fell from a record high on Monday and silver notched its biggest one-day loss in seven weeks after the killing of Osama bin Laden sapped the safe-haven premium out of precious metals.


Silver bounced off early lows after falling as much as 11 percent, as speculators scaled back their bullish bets on increased futures margins and a technical overhang after a 170 percent rally over the last 12 months to a record high last week.
Gold initially rose to a record high for a fourth consecutive session, but news of the al Qaeda leader's killing by U.S. forces sent gold down almost 2 percent. The CBOE gold volatility index, a gauge of bullion investor anxiety, posted its biggest-ever two-session gain since its inception in September last year.
"People are pulling out of gold and going back into the equity market, as the news had a de-risking effect on the geopolitical environment," said Steven Faber, analyst at Haber Trilix Advisors, which manages $2 billion in assets.
Investor buying later lifted bullion off its lows after data showed U.S. manufacturing activity slowed in April for a second straight month but input prices reached their highest level in nearly three years.
Spot gold was down 0.4 percent at $1,558.09 an ounce by 2:26 p.m. EDT (1826 GMT), after hitting a record high for a fourth straight session at $1,575.79. U.S. June gold futures settled up 70 cents at $1,557.10 after ranging from $1,540.30 to $1,577.40.

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It’s Getting Plain Silly: MF Global Hikes Silver Margin To 175% Of CME, Or Over 10% Of Contract

Tyler Durden's picture

Now it’s just getting plain silly. Following two margin hikes by the CME, one for 9% and one for 10% this week, now MF Global, run by former Goldman CEO Jon Corzine has joined the fray, and has hiked its silver margin to $25,397. As a reminder, the latest CME margin is $14,513, or about 6% of the contract value of $241,750 assuming a silver price of $48.35. So MF Global’s is 175% of the CME! It is obvious that everyone is now hell bent on destroying the parabolic move higher in gold and silver, which is happening for a very good reason: deranged money printing. Although, as yesterday, we very much doubt MF Global, or anyone else for that matter will hike ES margins any time soon. After all, doing anything to stop the Weimar rallyTM in its tracks is treason of the highest degree under Bernanke’s dictatorship and is punishable appropriately. In the meantime, can the exchange just make margin trading in commodities illegal and move to all cash? At least that way all the weak momo hands can be relegated to chasing Netflix and other bubbles, making their eventual pop all the more memorable.
h/t @gptrading

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Excellent piece on the silver run. 

Facts on Silver

Bob Moriarty
Archives
Apr 25, 2011

For those who missed my piece of March 25, 2011, here is the link. I asked the question, “Is Silver Topping?” I may have been right about silver topping, only time will tell. For certain I was dead wrong about the timing and the price. Silver has rocketed from $38 and change when I wrote the piece to over $47 now.
But lots of people get lots of things wrong about silver. So here are some facts.
1. Silver is going parabolic.
According to Jim Rogers all parabolic moves end badly. I have seen similar charts in all kinds of commodities and they always correct. Parabolic charts mark tops. So when silver bugs start suggesting, “This time it’s different” I know better.
Study the chart below. Ignore the commodity. When charts go parabolic, it ends badly. I was an investor in the 1970s in both gold and silver. I started buying gold at $35 and silver around $5 an ounce. I sold out all my silver in January of 1980 a week too early at $35 as it rocketed to $50.25 an ounce at the open on January 21, 1980. It went parabolic and basically that’s all you need to know.

Those investors who want to buy at new all time highs almost always are the same investors who want to sell at all time lows. Naturally as a guy running a metals site, I think $46 silver is wonderful for all my readers that I was telling to buy at $4 and $6 and $10 and $20. Is silver a good buy today? No, it’s a good sale… to those who insist on buying at tops.
2. The actual ratio of silver to gold in the earth’s crust is not 16 to 1.
It’s more like between 20 or 26 or 64 to one. This is not an absolute fact, these are opinions from experts but no experts conclude the ratio is 16-1. Go to Wikipedia and do the math for yourself.
What happens on the web is that one guy starts a rumor saying there are tens of thousands of gold-plated tungsten bars out there. Some other fool adds a few “facts” to the rumor and all of a sudden hundreds of sites are writing about fake gold bars.
Alas, years later not a single tungsten bar has showed up. It was rubbish and anyone who understood anything about metalworking would understand that technically it would be very hard to do. All 400 ounce gold bars are tracked and if by some strange process someone managed to counterfeit one, he would be caught at once. But you can sell a lot of subscriptions to those who pay to have their fantasies catered to.
It doesn’t matter how many people claim the ratio of silver to gold is 16-1, it simply isn’t true.
3. There is no shortage of silver. There never has been a shortage of silver. Until the laws of supply and demand are repealed, there never will be a shortage of silver.
The first person I ever read that claimed there was a shortage of silver was Ted Butler. He claimed in May that according to his figures the world was going to totally run out of silver by December. This was on the Kitco forum. I wrote and told him he was dead wrong, there were billions of ounces of silver above ground. His response was that according to his numbers, we would be out of silver bullion and that would drive the price of silver all by itself to between $50 and $100 an ounce. In a vacuum. Without gold going up or oil or anything else going up because of inflation. Silver was that rare.
My retort was that with billions of ounces around, prices would soon turn Grannie’s silver service into silver bullion. He insisted I didn’t know what I was talking about; he was the silver “GURU.” The exchange took place in May of 2001 and by December of 2001 I had correctly called the bottom in silver while he was insisting that it would be $50 an ounce. One of us was dead right.
But then he was also the guy claiming that silver was the most critical war material and if we ever go into a war, that would drive silver prices to between $50 and $100 an ounce and it was so rare that you should, “never, never, ever sell silver.” With the US engaged in three different wars at the same time, you would think that silver would be $300 an ounce. It’s not.
My question is, “If you were smart enough to buy 100 ounces of silver at $4 an ounce, a 5000-year low in real terms, how much profit have you made if silver goes to $50 or $100 or $300 and you never, never, ever sell? The answer, of course, and ignored by all the silver “GURUS” is that if you buy low and don’t sell ever, you don’t make any profit. That may be the dumbest investment advice I have ever heard.
Silver is a commodity like any other. If you are smart enough to buy it cheap and you are smart enough to sell it when it gets expensive, you will profit. If you want to buy at all time highs, good luck with that.
There are 19 billion ounces of silver above ground today. People talking about silver “bullion” inventories are being misleading. Silver is silver is silver and it only takes a day to turn a few 200 year-old-tea pots into a boring 1000 ounce “bullion” bar.
Just how accurate is the 19 billion ounce figure? We can figure that out with simple logic. I think the figure accepted by more people for total silver production ever would be about 45 billion ounces. A favorite argument of the permabulls is that silver is consumed, not recycled. Let’s think about that. Silver is used in computers, iPhones, aircraft, and lots of commercial purposes where it isn’t recycled. But that use of silver wasn’t common until perhaps 1960. Silver before that time was recycled. Yes, silver coins did wear but they didn’t wear out, they might lose 20% of their original weight.
If 45 billion ounces were produced, it’s more logical that a good percentage of it is still around. I was in my coin dealer’s shop a week ago. He bought 2800 ounces of silver on Saturday. Not a bar of bullion in the bunch but 2800 ounces of real silver in other forms. The numbers on silver are not hard numbers; we simply don’t know how much silver is around. But we do know there is a lot of silver and with the exception of a short period between the end of November of 1979 and January 21 of 1980, a mere six weeks later, silver has been well under $10 an ounce on average for the last 40 years. How rational is $46 silver? Not very.
I’d guess most silver mines have cash costs between $3 and $10. A market price of $46 an ounce will suck silver out of grannies’ closets and out of the ground at the same time. Every silver refinery in the world is running at capacity right now, if you want silver, there is a lot of it around.
4. The most illogical thinking and worst use of “facts” is common among the silver uberbulls and the parrots that follow them.
Someone just posted the most incredible theory on the validity of SLV. That’s the silver ETF that has been trashed for years by a small group of uberbulls with an agenda. One of their supporters came up with a brilliant argument. Since we don’t really know and can’t prove that SLV actually has all the physical silver, the proof that it is a scam is when they deny it being a scam. Read that carefully. The proof that it is a scam is when they deny it.
So, apparently, if you ask the people behind SLV if it is a scam and they admit it, that means we know it’s a scam since they admitted it. And if you ask the people behind the SLV if it is a scam and they deny it, that also means it is a scam because the proof is when they deny it.
I think that’s circular logic. No matter what the people behind SLV say, it’s a scam.
I have said in the past I have reservations about ETFs and I think investors should be aware of those reservations. If we have a total economic collapse and the financial system freezes, all ETFs could be frozen or worse for months. That includes Sprott’s paper silver, the CEF and SLV and all ETFs of all sorts. What happened in Argentina could happen in the US, it could happen all over the world. It’s entirely possible that all banks close for a good period of time, after all they are insolvent now and have been since September of 2008. But a financial freeze would affect all forms of paper silver including Sprott’s silver trust.
The CEF fund and the SLV have done more to improve the price of silver and gold than any other single action in the last 50 years. Silver bugs should be grateful SLV holds 366 million ounces of silver instead they are whining and posting simply absurd articles totally lacking in either facts or logic.
When someone posts something that ridiculous and lacking in logic, you may safely presume they don’t know what they are talking about. That’s real common when people write about silver and it’s going to cost investors a whole lot of money.
The daily bullish consensus on silver is 96% as of Wednesday the 20th of April. On January 21st of 1980, the very day of the top, the bullish consensus was 94%. How many of the silver uberbulls are suggesting that maybe the record high bullish consensus is suggesting a very dangerous time to start buying? The answer is damned few because they have an agenda and their agenda doesn’t involve them knowing what they are talking about. As long as they tell investors what they want to hear, they will be very popular.
5. There cannot be a run on Comex. The rules do not allow the chance for a run.
For years I have watched as each time silver runs up, certain people start spreading rumors that silver is in such shortage that there will be a run on Comex. The only problem with the rumor is that it can’t possibly happen. There cannot be a run on Comex. I repeat, there cannot be a run on Comex.
Part of the reason for the rumor is that most investors confuse the purpose of the exchanges. The purpose of the exchanges is not to exchange commodities. The purpose of the exchanges is to determine price. But certainly the possibility of a run on an exchange is possible so early on the exchanges adopted rules that called for cash settlement if necessary.
Most people don’t know this because they don’t read the small print but if you have a savings account, the bank has the right to withhold payment for up to 90 days. And all mortgages are essentially 90 notes at their heart. That’s right, the bank can demand full payment within 90 days if they wish and during the 1930s that’s how thousands of Americans lost their homes even when they were paying their mortgage.
I don’t write the rules and you don’t write the rules and they are what they are if you like it or not. There cannot be a run on silver, it’s impossible. So anyone writing about it is spreading disinformation. Of course anyone who ever passed a Series 7 exam know this but you will never hear the silver uberbulls mention it. I wonder why.
There are three guys in the mining business that are so smart and have such great track records that for 70% of investors in metals, they should buy into their mutual funds and stop trying to outsmart the market by picking stocks. The top three guys in the industry are Ken Gerbino, Eric Sprott and Frank Holmes. If you like metals and shares in resource stocks, stop trying to be so smart yourself, it’s difficult work. Hand your money to them to invest in one of their funds and you will do just fine.
That said, Eric Sprott seems to have done something that hasn’t happened to the market since the days of Johnny Carson. You have to be getting on in age to remember it but back in 1973 Johnny Carson started a toilet paper shortage that lasted a month. He was making a joke. He said that there was a toilet paper shortage. The next day, millions of rolls of toilet paper flew off the shelves of every store in the US and by noon there was no toilet paper to be had. It was nothing but a joke.
Don’t let anyone convince you that supply and demand doesn’t work. They do work and that’s far more important for you to know than belief in some mysterious manipulation conspiracy theory. I’ve heard all the stories and know all the arguments. No one in history has made a cent from a belief in market manipulation.
If gold has gone up 4100% since 1950, higher than any other commodity, anyone manipulating it down has done a piss poor job. And who cares if 4 guys have sold more silver short than exists in the known universe? Those are all interesting theories but that’s all they are. If you don’t buy low and sell high, you can’t make money. End of story.
Eric Sprott started his own paper silver fund called the Sprott Physical Silver Trust. It’s still paper silver like SLV or the CEF fund. It has some unique features, not benefits but features. He has done a brilliant job of promoting it.
Recently he purchased $300 million dollars more physical silver to put in the closed fund. As a result of his excellent promotion, as of last Wednesday, silver was selling for $46. If you bought the CEF silver fund, you paid $47.88 for silver. If you bought SLV, you paid $46 with no premium but if you bought PSLV, the Sprott Silver Trust, you paid an incredible $57.73 an ounce for silver.
I’d say that Eric Sprott buying $300 million dollars more silver lately was incredible timing. He pocketed probably $60 million in profit. Is Eric Sprott bullish on silver? I’d say so. He has 60 million reasons to be bullish. He can buy at the exact top of silver and watch a 25% decline and still make money.
How wise was it for investors to pay a 25% premium for silver? I’d like to believe my readers are smart enough to figure that out for themselves. Eric Sprott is both brilliant and rich but paying 25% over spot is not wise investing.
The Hunt Brothers investing in silver drove silver to $50.25 an ounce for a few minutes on January 21, 1980. I think it would be fair to credit the silver boom of 2011 to Eric Sprott. He’s not really saying anything new about silver, though, Ted Butler was claiming that we were about to run out of silver 10 years ago and claiming that silver was the most manipulated of all metals long before Eric Sprott bought his first ounce of silver for a fund. But Eric Sprott adds credibility. But we weren’t running out of silver ten years ago. We aren’t running out of silver now.
One of two things is going to happen. Either we are at a top and silver is about to crash both hard and long, or the world’s financial system is about to fall apart. I have been an advocate of a total financial crash for a lot longer than most writers. I was writing about the dangers of derivatives in 2002 when they were 15% of what they are now.
But I don’t believe the world’s financial system is going to crash next week. As in January of 1980, the silver bulls are going to be the ones losing money. You can’t profit if you don’t sell and all the permabulls are screaming “Buy, buy, buy.” As they will at every top. Buying at record high prices is rarely profitable. But perhaps this time it really is different.
Here’s what all potential investors in silver need to know.

  1. The chart of silver has gone parabolic. Parabolic charts mark tops no matter what the commodity.
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  2. The bullish consensus on silver is at a record high. Record high bullish consensus on any commodity is common at tops.
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  3. When the most credible guys in an industry start explaining why supply and demand don’t really work, it’s a top. With 19 billion ounces of silver above ground we aren’t about to run out any time soon.
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  4. When guys start writing about silver that didn’t have a clue as to what it was or what it was used for at the bottom, you are at a top. I’m astonished at both the ignorance and the arrogance of the newly invented silver “Gurus.”
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  5. When the smartest guys in an industry start telling you, “This time it’s different,” it’s not. It’s just a top.
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Bob Moriarty
President: 321gold


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April 14 2011 6:34 PM GMT
Glencore trading empire unveiled

By Javier Blas in London

Rivals fear growing financial muscle of group heading for london and HK listing and its influence on prices

Read the full article at: http://www.ft.com/cms/s/0/6d347810-66bf-11e0-8d88-00144feab49a.html?ftcamp=rss

Sent from a wireless device.





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