Inflation – Has it arrived?

[CA renter]

[quote=ucodegen][quote CA renter]Regarding taxation on commodities, what about ETFs? Long-term futures? I honestly don’t know about the tax treatment on these things. [/quote]
ETFs are not a commodities, but they are taxed the same as stocks on gain (long term vs short term). Dividends are not taxed but may be taxed in the foreign country. If taxed in the foreign country you ‘may’ get the ability to write off that tax against any taxable income in the states.

Long term futures.. I would need to double check. Most futures are posted in at under a year.

[quote CA renter]I do know someone with a lot of experience in commodities trading, and they are heavily leveraged in very, very large positions at this point in time. This person has no use for the commodity being traded. It is all speculation.[/quote]
First, realize that with heavy leverage, a bad direction change in the market can instantly wipe you out. On any leverage position, you have to have enough reserve capital to be able to cover your position. If you are leveraged 10:1 on an asset that takes a 10% hit, you are now broke! Leverage is great on the way up but really bites on the way down.

Speculation has a purpose. It allows the original producers of a good to guarantee sale at a specific price in the ‘future’. This is particularly useful for goods that take time to produce or get to market. The speculator doesn’t always win. If a speculator picks up oil contracts at $120/barrel (barrel = 42 gal. crude, 1 contract = 1000 barrels), but come contract delivery time, all they can get on the market when they try to sell the contract is $90/barrel.. they are out ($120 – $90)*1000 = $30,000. They have to have to sell the contract before the delivery date of the futures contract or else they are actually going to have to accept delivery of 42,000 gallons of crude + pay the strike price of $120/barrel = $120,000. The movie “Trading Places” has an example of what can happen when you speculate incorrectly on a futures contract (it is a bit simplified, but very real, when you don’t have the assets to cover your position).

Of course – if the price is higher come contract delivery time, or they can sell the contract at a higher price before delivery time, they can make money.

The speculation can make the market more volatile, but it can also smooth out the market. Look at it from the side of the producer. If the producer of the good has a reasonable idea of what their goods are worth, they can sell contracts for delivery when the price is higher than normal and plan for delivery on that date. If the contracts are priced below the normal market price, the producer can decide to either warehouse the goods or cut production for that period of time in the future.

A speculator can also sell contracts short if they anticipate the future price of the commodity is lower than what its current strike price is.[/quote]

Thank you very much for your response, ucodegen.

I greatly appreciate your checking into L/T gains on futures, but totally understand if you don’t have the time. It would be interesting to see how it’s handled. Yes, most futures are shorter-term, but I believe they also can trade 1 yr+.

Okay…just found this:

“The good news for traders of Section 1256 contracts is threefold:

60% of the capital gain or loss from Section 1256 Contracts is deemed to be long-term capital gain or loss and 40% is deemed to be short-term capital gain or loss. What this means is a more favorable tax treatment of 60% of your gains.”

http://www.tradelogsoftware.com/tax-topics/futures/

So, it looks like ALL gains or losses on futures (short or long-term) have this 60/40 tax treatment??? Is that how you read it?

Again, more favorable taxation for speculation vs. labor. I have a problem with that.

==================

Yes, I understand the benefits of using futures contracts for suppliers AND for the end users (airlines being able to secure contracts at a known price, for instance). However, I think there is an optimal volume of trading that can smooth things out, and not create too much volatility. IMHO, too much trading volume when there is speculation about future price increases can exacerbate the volatility, leading to tremendously damaging booms and busts that seriously harm both the producers and the end users.

Regarding the leverage; the person I know who is heavily leveraged is a former professional commodities trader (higher up), and from what I know, can cover the positions. My point is that I’m sure this person isn’t the only one out there doing this right now, and in the interim, they can cause sever price spikes and distortions that will eventually lead to severe crashes when it comes to delivery time. They are rolling contracts over, but I still think it’s a big deal.

IMHO, we are going to see a big crash in commodities in the next two years as the end users for these goods cannot afford them at current speculative prices. Another bubble caused by the Federal Reserve and all this money pumping. The money is going into the hands of speculators rather than end-users. This will end badly, IMHO.

[CA renter]

[quote=enron_by_the_sea][quote=ucodegen]
ETFs are not a commodities, but they are taxed the same as stocks on gain (long term vs short term). [/quote]

It is actually more complicated than that. If an ETF holds commodities (e.g. Gold ETF – GLD), all capital gains are short term, regardless of how long you hold it.

Some commodity ETFs are structured as partnerships which means you get a K-1 and can have all the fun you want with it.

http://etftutor.info/2011/03/09/how-uncle-sam-treats-etfs-and-etns/%5B/quote%5D

Thank you for your insight, enron.

[CA renter]

[quote=enron_by_the_sea][quote=ucodegen]
ETFs are not a commodities, but they are taxed the same as stocks on gain (long term vs short term). [/quote]

It is actually more complicated than that. If an ETF holds commodities (e.g. Gold ETF – GLD), all capital gains are short term, regardless of how long you hold it.

Some commodity ETFs are structured as partnerships which means you get a K-1 and can have all the fun you want with it.

http://etftutor.info/2011/03/09/how-uncle-sam-treats-etfs-and-etns/%5B/quote%5D

Thank you for your insight, enron.

[CA renter]

[quote=enron_by_the_sea][quote=ucodegen]
ETFs are not a commodities, but they are taxed the same as stocks on gain (long term vs short term). [/quote]

It is actually more complicated than that. If an ETF holds commodities (e.g. Gold ETF – GLD), all capital gains are short term, regardless of how long you hold it.

Some commodity ETFs are structured as partnerships which means you get a K-1 and can have all the fun you want with it.

http://etftutor.info/2011/03/09/how-uncle-sam-treats-etfs-and-etns/%5B/quote%5D

Thank you for your insight, enron.

[CA renter]

[quote=enron_by_the_sea][quote=ucodegen]
ETFs are not a commodities, but they are taxed the same as stocks on gain (long term vs short term). [/quote]

It is actually more complicated than that. If an ETF holds commodities (e.g. Gold ETF – GLD), all capital gains are short term, regardless of how long you hold it.

Some commodity ETFs are structured as partnerships which means you get a K-1 and can have all the fun you want with it.

http://etftutor.info/2011/03/09/how-uncle-sam-treats-etfs-and-etns/%5B/quote%5D

Thank you for your insight, enron.

[CA renter]

[quote=enron_by_the_sea][quote=ucodegen]
ETFs are not a commodities, but they are taxed the same as stocks on gain (long term vs short term). [/quote]

It is actually more complicated than that. If an ETF holds commodities (e.g. Gold ETF – GLD), all capital gains are short term, regardless of how long you hold it.

Some commodity ETFs are structured as partnerships which means you get a K-1 and can have all the fun you want with it.

http://etftutor.info/2011/03/09/how-uncle-sam-treats-etfs-and-etns/%5B/quote%5D

Thank you for your insight, enron.

[CA renter]

[quote=ucodegen]ETFs are not a commodities, but they are taxed the same as stocks on gain (long term vs short term). Dividends are not taxed but may be taxed in the foreign country. If taxed in the foreign country you ‘may’ get the ability to write off that tax against any taxable income in the states.

[/quote]

Forgot to address this. This article is from 2010, speaking about the dislocations between ~2007-2009:

Turning commodity futures into securities unleashed a much larger sales force — stockbrokers selling a product many of them didn’t understand, he says. Passive buy-and-hold investors at one point in mid-2008 held the equivalent of three years of production of soft red winter wheat. Wall Street’s success in attracting those buyers boosted demand for futures contracts, which helped determine what consumers would pay for baked goods.

Wheat prices jumped 52 percent in early 2008, setting records before plunging again, and sugar more than doubled last year even as the economy slowed, forcing Reinwald’s Bakery in Huntington, New York, to fire five of its 32 employees. “You try and budget to make money, but that’s becoming impossible to predict,” says owner Richard Reinwald, chairman of the Retail Bakers of America.

Cocoa futures reached a 30-year high early this year because of speculators, according to Juergen Steinemann, chief executive officer of the world’s largest maker of bulk chocolate, Zurich-based Barry Callebaut. At the airport, the new $25 charge for checking a suitcase exists partly because airlines have to set aside cash to hedge against sharper ups and downs in oil prices, says Bob Fornaro, CEO of AirTran Holdings. “This has been very, very good for Wall Street,” he says.

http://www.bloomberg.com/news/2010-07-22/etfs-imperil-commodity-investors-when-contango-conspires-with-pre-rolling.html

[CA renter]

[quote=ucodegen]ETFs are not a commodities, but they are taxed the same as stocks on gain (long term vs short term). Dividends are not taxed but may be taxed in the foreign country. If taxed in the foreign country you ‘may’ get the ability to write off that tax against any taxable income in the states.

[/quote]

Forgot to address this. This article is from 2010, speaking about the dislocations between ~2007-2009:

Turning commodity futures into securities unleashed a much larger sales force — stockbrokers selling a product many of them didn’t understand, he says. Passive buy-and-hold investors at one point in mid-2008 held the equivalent of three years of production of soft red winter wheat. Wall Street’s success in attracting those buyers boosted demand for futures contracts, which helped determine what consumers would pay for baked goods.

Wheat prices jumped 52 percent in early 2008, setting records before plunging again, and sugar more than doubled last year even as the economy slowed, forcing Reinwald’s Bakery in Huntington, New York, to fire five of its 32 employees. “You try and budget to make money, but that’s becoming impossible to predict,” says owner Richard Reinwald, chairman of the Retail Bakers of America.

Cocoa futures reached a 30-year high early this year because of speculators, according to Juergen Steinemann, chief executive officer of the world’s largest maker of bulk chocolate, Zurich-based Barry Callebaut. At the airport, the new $25 charge for checking a suitcase exists partly because airlines have to set aside cash to hedge against sharper ups and downs in oil prices, says Bob Fornaro, CEO of AirTran Holdings. “This has been very, very good for Wall Street,” he says.

http://www.bloomberg.com/news/2010-07-22/etfs-imperil-commodity-investors-when-contango-conspires-with-pre-rolling.html

[CA renter]

[quote=ucodegen]ETFs are not a commodities, but they are taxed the same as stocks on gain (long term vs short term). Dividends are not taxed but may be taxed in the foreign country. If taxed in the foreign country you ‘may’ get the ability to write off that tax against any taxable income in the states.

[/quote]

Forgot to address this. This article is from 2010, speaking about the dislocations between ~2007-2009:

Turning commodity futures into securities unleashed a much larger sales force — stockbrokers selling a product many of them didn’t understand, he says. Passive buy-and-hold investors at one point in mid-2008 held the equivalent of three years of production of soft red winter wheat. Wall Street’s success in attracting those buyers boosted demand for futures contracts, which helped determine what consumers would pay for baked goods.

Wheat prices jumped 52 percent in early 2008, setting records before plunging again, and sugar more than doubled last year even as the economy slowed, forcing Reinwald’s Bakery in Huntington, New York, to fire five of its 32 employees. “You try and budget to make money, but that’s becoming impossible to predict,” says owner Richard Reinwald, chairman of the Retail Bakers of America.

Cocoa futures reached a 30-year high early this year because of speculators, according to Juergen Steinemann, chief executive officer of the world’s largest maker of bulk chocolate, Zurich-based Barry Callebaut. At the airport, the new $25 charge for checking a suitcase exists partly because airlines have to set aside cash to hedge against sharper ups and downs in oil prices, says Bob Fornaro, CEO of AirTran Holdings. “This has been very, very good for Wall Street,” he says.

http://www.bloomberg.com/news/2010-07-22/etfs-imperil-commodity-investors-when-contango-conspires-with-pre-rolling.html

[CA renter]

[quote=ucodegen]ETFs are not a commodities, but they are taxed the same as stocks on gain (long term vs short term). Dividends are not taxed but may be taxed in the foreign country. If taxed in the foreign country you ‘may’ get the ability to write off that tax against any taxable income in the states.

[/quote]

Forgot to address this. This article is from 2010, speaking about the dislocations between ~2007-2009:

Turning commodity futures into securities unleashed a much larger sales force — stockbrokers selling a product many of them didn’t understand, he says. Passive buy-and-hold investors at one point in mid-2008 held the equivalent of three years of production of soft red winter wheat. Wall Street’s success in attracting those buyers boosted demand for futures contracts, which helped determine what consumers would pay for baked goods.

Wheat prices jumped 52 percent in early 2008, setting records before plunging again, and sugar more than doubled last year even as the economy slowed, forcing Reinwald’s Bakery in Huntington, New York, to fire five of its 32 employees. “You try and budget to make money, but that’s becoming impossible to predict,” says owner Richard Reinwald, chairman of the Retail Bakers of America.

Cocoa futures reached a 30-year high early this year because of speculators, according to Juergen Steinemann, chief executive officer of the world’s largest maker of bulk chocolate, Zurich-based Barry Callebaut. At the airport, the new $25 charge for checking a suitcase exists partly because airlines have to set aside cash to hedge against sharper ups and downs in oil prices, says Bob Fornaro, CEO of AirTran Holdings. “This has been very, very good for Wall Street,” he says.

http://www.bloomberg.com/news/2010-07-22/etfs-imperil-commodity-investors-when-contango-conspires-with-pre-rolling.html

[CA renter]

[quote=ucodegen]ETFs are not a commodities, but they are taxed the same as stocks on gain (long term vs short term). Dividends are not taxed but may be taxed in the foreign country. If taxed in the foreign country you ‘may’ get the ability to write off that tax against any taxable income in the states.

[/quote]

Forgot to address this. This article is from 2010, speaking about the dislocations between ~2007-2009:

Turning commodity futures into securities unleashed a much larger sales force — stockbrokers selling a product many of them didn’t understand, he says. Passive buy-and-hold investors at one point in mid-2008 held the equivalent of three years of production of soft red winter wheat. Wall Street’s success in attracting those buyers boosted demand for futures contracts, which helped determine what consumers would pay for baked goods.

Wheat prices jumped 52 percent in early 2008, setting records before plunging again, and sugar more than doubled last year even as the economy slowed, forcing Reinwald’s Bakery in Huntington, New York, to fire five of its 32 employees. “You try and budget to make money, but that’s becoming impossible to predict,” says owner Richard Reinwald, chairman of the Retail Bakers of America.

Cocoa futures reached a 30-year high early this year because of speculators, according to Juergen Steinemann, chief executive officer of the world’s largest maker of bulk chocolate, Zurich-based Barry Callebaut. At the airport, the new $25 charge for checking a suitcase exists partly because airlines have to set aside cash to hedge against sharper ups and downs in oil prices, says Bob Fornaro, CEO of AirTran Holdings. “This has been very, very good for Wall Street,” he says.

http://www.bloomberg.com/news/2010-07-22/etfs-imperil-commodity-investors-when-contango-conspires-with-pre-rolling.html

[enron_by_the_sea]

[quote=CA renter]

http://www.bloomberg.com/news/2010-07-22/etfs-imperil-commodity-investors-when-contango-conspires-with-pre-rolling.html%5B/quote%5D

Thanks for the link. I found this section especially distressing ..

The commodity ETFs weren’t living up to their hype, and the reason had to do with a word Wolf had never heard before. As he browsed the blogs, he says, “I’m seeing people talking about something called contango. Nobody would define it.” Wolf called his broker and asked about contango. “I don’t know what it is,” he replied. He called his other broker, at Charles Schwab. “He didn’t know either,” Wolf says. “He said he’d ask around.”

It always pisses me off, that complete morons get to become brokers/investment advisers on wall street and tend to easily raise millions of dollars to manage! It is like a blind leading a blind!

[enron_by_the_sea]

[quote=CA renter]

http://www.bloomberg.com/news/2010-07-22/etfs-imperil-commodity-investors-when-contango-conspires-with-pre-rolling.html%5B/quote%5D

Thanks for the link. I found this section especially distressing ..

The commodity ETFs weren’t living up to their hype, and the reason had to do with a word Wolf had never heard before. As he browsed the blogs, he says, “I’m seeing people talking about something called contango. Nobody would define it.” Wolf called his broker and asked about contango. “I don’t know what it is,” he replied. He called his other broker, at Charles Schwab. “He didn’t know either,” Wolf says. “He said he’d ask around.”

It always pisses me off, that complete morons get to become brokers/investment advisers on wall street and tend to easily raise millions of dollars to manage! It is like a blind leading a blind!

[enron_by_the_sea]

[quote=CA renter]

http://www.bloomberg.com/news/2010-07-22/etfs-imperil-commodity-investors-when-contango-conspires-with-pre-rolling.html%5B/quote%5D

Thanks for the link. I found this section especially distressing ..

The commodity ETFs weren’t living up to their hype, and the reason had to do with a word Wolf had never heard before. As he browsed the blogs, he says, “I’m seeing people talking about something called contango. Nobody would define it.” Wolf called his broker and asked about contango. “I don’t know what it is,” he replied. He called his other broker, at Charles Schwab. “He didn’t know either,” Wolf says. “He said he’d ask around.”

It always pisses me off, that complete morons get to become brokers/investment advisers on wall street and tend to easily raise millions of dollars to manage! It is like a blind leading a blind!

[enron_by_the_sea]

[quote=CA renter]

http://www.bloomberg.com/news/2010-07-22/etfs-imperil-commodity-investors-when-contango-conspires-with-pre-rolling.html%5B/quote%5D

Thanks for the link. I found this section especially distressing ..

The commodity ETFs weren’t living up to their hype, and the reason had to do with a word Wolf had never heard before. As he browsed the blogs, he says, “I’m seeing people talking about something called contango. Nobody would define it.” Wolf called his broker and asked about contango. “I don’t know what it is,” he replied. He called his other broker, at Charles Schwab. “He didn’t know either,” Wolf says. “He said he’d ask around.”

It always pisses me off, that complete morons get to become brokers/investment advisers on wall street and tend to easily raise millions of dollars to manage! It is like a blind leading a blind!

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