~~~~ CONSUMER WARNING ~~~~
BEWARE OF PROMISES OF EASY PROFITS FROM COMMODITIES TRADING BASED ON SEASONAL DEMAND AND OTHER PUBLIC INFORMATION
Consumers need to be alert to efforts to sell commodity futures or options to them based upon a sales pitch that you can make a lot of money with little risk by rushing into the commodities markets in advance of seasonal changes or in response to publicly-issued reports or well-known current events.
The United States Commodity Futures Trading Commission (CFTC) is the federal agency that regulates the trading of commodity futures and options contracts in the United States and brings actions against firms suspected of illegally or fraudulently selling commodity futures and options. Over the past several years, the CFTC has brought actions against wrongdoers who lured customers by claims that one could earn large profits with little risk based on predictable seasonal demands, published reports, or well-known current events.
Companies often use advertisements on radio and television, as well as infomercials – program-length television commercials – to promote commodity futures and options. These advertisements may claim that seasonal trends in the demand for certain commodities or well-known current events create an opportunity to make big money by trading in commodity futures and options. The advertisements and infomercials promise quick riches – such as turning $5,000 into $20,000 in just a few months – with predetermined risk. A toll-free number will be announced or appear on the television screen inviting you to call if you want more information.
For example, advertisements on radio or television may urge you to purchase commodity options in heating oil because increased demand for heating oil in the winter is likely to push up heating oil prices. The pitch might go something like this:
It won't be long before cold weather is here. Heating oil inventories are down and demand is going up. There are warnings about shortages already. Get the facts on how $5,000 properly positioned can return $20,000 or more with just a ten cent move in heating oil prices. Past performance is not indicative of future results and people can lose money. Low supplies and high demand equals higher prices. Get the strategies now by calling 1-800-XXX-XXXX. $5,000 can return $20,000 or more but timing and strategy is the key.
Similarly, in the spring, advertisements may tout commodity options in unleaded gasoline because increased consumption of gasoline in the summer is likely to boost gasoline prices. Or you may receive a phone call from a salesperson urging you to invest quickly in futures for certain agricultural commodities because El Nino has driven up prices on those commodities or a recently-issued government report has described shortages of that commodity.
What's Wrong With The Pitch?
These sales pitches are false. Seasonal increases in the demand for commodities do not necessarily result in the increased value of an option or futures contract on those commodities because the market has already factored seasonal demand into the price of futures and options. The same is true of well-known information like El Nino or government reports. The markets respond immediately – within a few hours, often a few minutes – to new information. In other words, the prices of commodity options and futures contracts already take into account all known or predictable market conditions, such as seasonal changes in demand for a commodity or known shortages of a commodity. The advent of the summer and winter seasons, or the latest United States Department of Agriculture report on crop size, is not news that is known to only a few.
Moreover, claims that the risk of purchasing commodity futures and options can be predetermined or fixed are misleading. Purchasers of commodity option contracts can lose every penny of their investments and because futures contracts are "leveraged" or "margined," futures investors can lose more than their investments.
You May Be Pitched Via Radio, Television, The Telephone, Or The Internet
Aside from television and radio advertisements, you may hear these sales pitches in telephone call solicitations, e-mail messages, internet advertisements or web-sites, or during discussions on internet chat rooms. In recent months, concerned consumers have forwarded to the CFTC's Division of Enforcement a number of unsolicited e-mail messages transmitted over the Internet. These "spam," or mass-mailed, e-mails tout investment opportunities in a variety of commodities, typically predicting high returns based on seasonal price trends in a particular commodity or on weather-related news developments such as El Nino. Also, in some instances, the company that has produced and arranged for a television or radio advertisement is not registered to offer or sell commodity futures or options, but instead will sell your name to brokers who will then make similar claims in a telephone sales pitch. In a subsequent, high-pressure call, a salesperson may repeat the seasonal come-on, or a similar claim, and urge you to act quickly to seize this "can't miss" opportunity.
Warning Signs Of Commodity Futures Or Options Come-Ons
If you are solicited by a company that claims to trade commodities and asks you to commit funds for those purposes, you should be very careful. Watch for the warning signs listed below, and take the following precautions before placing your funds with any commodity trading company that offers leveraged or financed commodity transactions:
For More Information and Contacts
General information on the commodity futures markets and the CFTC is available through the World Wide Web. Members of the public may report suspected wrongdoing to the CFTC's Web site at www.cftc.gov. You also can communicate directly with the CFTC's Division of Enforcement via e-mail at firstname.lastname@example.org. You may also write or call the U.S. Commodity Futures Trading Commission, Division of Enforcement, Three Lafayette Centre, 1155 21st Street, N.W., Washington, DC 20581, (202) 418-5320.