As cotton surged, China trader amassed $510 million bet
A research note posted on Chaos Investment's website suggests it may have hoped for a bounce.
"In my opinion, even though demand is not good, cotton prices should be encouraging in Q3," said the note by a fund analyst named Zhau Zhenlin posted on May 13, with cotton trading at just $1.45 a pound.
But prices kept diving, never to recover.
By July 18, with cotton just $1 per pound, Ge was once again in excess of limits, the CFTC said. By then his position in a single month would have accounted for about 4 percent of the most-active second-month contract, with an estimated notional value of some $175 million, data shows.
Ge's presence may have contributed to the already-wild price swings, traders said.
"There is no question that they added to the fun on the upside and downside," said Dennis Gartman, a commodities trader and publisher of The Gartman Letter. "If they buy it, they have to get rid of it."
Traders speculated that Ge may have unwittingly accumulated an excessive position given the meteoric speed at which prices were soaring on a daily basis.
"It was going up so fast, you could have had exposure immediately and it piles up quick," said a floor trader.
Mr. 34 Percent?
During the period of Gu's early 2011 holdings, spot-month cotton futures surged by more than 34 percent in what would prove to be the last leg of a months-long rally fueled by signs of tightening supplies in Pakistan and the United States, undaunted demand from China and a fever among hedge funds.
Cotton traders say that while they have been broadly aware of increasing Chinese trading in U.S. markets, including a growing arbitrage between ICE and the two contracts in China, the state-owned China National Cotton Exchange and Zhengzhou Commodity Exchange, the scale of Ge's activity was surprising.
"Years ago, everyone would have blamed Cargill, Dunavant, Allenberg and any of the guys on Front Street in Memphis," said Gartman, referring the heart of the U.S. cotton industry.
Chinese investors are keen to tap investment opportunities in overseas markets, although their options are restrained by China's strict capital controls.
Although Ge's position was higher than what is allowed for speculators, it does not necessarily mean it had the biggest trade in the market. Long positions held by hedge funds and big speculators in general accounted for only about a 10th of the total cotton market at the time, CFTC data showed.
Instead, big merchants like Louis Dreyfus' Allenberg and Glencore are thought of as the biggest players, using the market to hedge their global physical cotton supplies as they buy from Texas farmers and sell to Chinese mills.