From Pragmatic Capitalism:
In June of 2008 Goldman Sachs released a research report titled “Speculators, Index Investors, and Commodity Prices”. The report was intended to defend the growing role of speculators and “investors” in the commodities markets. If you’ll recall, it was around this time that many were wondering whether there wasn’t an irrational exuberance in the commodity space that was being largely driven by irrational participants. Goldman, being one of the larger participants, defended their role in the markets and concluded that speculators were not driving prices beyond their fundamentals and that there was no evidence of a bubble in the commodity market A single question and answer from the June 2008 paper succinctly summarized their position at the time:
“Q12: How do we know if fundamentals support prices at these levels, or how do we know this isn’t a speculative bubble?
A: If commodity futures price were too high relative to the underlying supply and demand fundamentals, we would expect to observe large inventory builds, which we do not observe.
The simplest way to address the question of whether the underlying supply and demand fundamentals support prices at these high levels is to ask what would happen if they did not. Suppose commodity prices were too high, then we would expect to see those high commodity prices curbing demand too much, bringing too much supply to the physical market and the resulting excess of supply over demand generating a large build in the physical commodity inventories. Consequently, increasing physical commodity inventories would be the main indicator that current prices are not supported by current fundamentals. The fact that across the commodity markets, we are not observing anything approaching sustained growth in physical inventory indicates that current prices are supported by supply and demand fundamentals.
Previously:Therefore, we find the concerns that commodity markets are in the midst of a speculative bubble unwarranted. Physical commodity inventories are not growing, and in fact remain near the bottom of the historical range for many commodities. Net speculative length in the petroleum futures markets has not increased significantly since 2004, even as WTI crude oil prices have risen from $40/bbl to near $140/bbl. In sum, the commodity markets are not behaving in a way that a speculative bubble would suggest.“ (emphasis added)In retrospect, it’s clear that there were distortions in the commodity markets and that fundamentals were nowhere near in-line with actual market prices. Speculators and irrational market participants were clearly helping to drive prices on both the way up and the dramatic way down in 2008. Goldman later backed down from their 2008 comments admitting that speculators did indeed contribute to the speculative run-up...MUCH MORE
Nov. 2010
"The financialisation of commodities"
June 2010
"Bread and Derivatives: Goldman’s control of market structure might just starve us, strand us, and leave us in the dark. Literally." (GS)
which had the following list of posts. As I said then, "We're no blogger come lately, no sirree".
The July 2009 post "Oil: the Market is the Manipulation" is worth a look, if you're into this type of thing:
...Here's Chris Cook at TOD:
...When I joined the International Petroleum Exchange as Head of Compliance and Market Regulation in 1990, the growing market in oil derivative contracts (futures and options contracts the purpose of which is to manage oil price risk) took off dramatically with the first Gulf War, and the IPE never looked back....
Some of our posts:
July 2008
Dear CFTC: About those Oil Markets. And: A Stock Tip
...The long-only index investors have created such a distortion in the market that very few speculators are willing to go short, which is one of the functions of speculators in the markets. Now, if you have program trading kicking in, only a fool would take the other side of a buy order. The CFTC has become the Nevada Gaming Commission....October 2008
Commodities: $50 bln in 'long-only funds' flees commods markets. And: Calpers says staying the course on commodities
...I am looking forward to CalPERS quarterly results. While the recent ugliness won't have an immediate impact on their ability to meet their promises to retirees, I'm guessing that it will end up being a good thing that they can make up any longer-term shortfall by taxing California residents. This could get serious.October 2008
Regarding the long only commodities "investors", look for a hit to Goldman's earnings. As proprietors of the GSCI they have at least half the "roll" business. Assuming 2% slippage (fees, spreads, commissions) on the $50 Bil. just removed from the markets and you have $500 mil. in gravy they won't get to put on their spuds....
Calpers fund down 25 percent for year
February, 2009
Danish Pension Fund Giant Investing 'up to $400 Million' in Hudson Clean Energy
...Instead, CalPERS' idea of alt investment is buying raw land top tick of the housing bubble ($1 Bil. write-off) or gunning commodity prices via long-only index investments and swaps*....February, 2009
...*Goldman bagged 'em. I mean they took CalPERS deep! First they tout $200/bbl. oil, then after the collapse:
From Barron's, Nov. 20, 2008 via our post "It’s official, Goldman capitulates on oil"-...
U.S. Oil Trust Investigated by CFTC (USO)
...The “speculator limits”, says Nymex are there to “effectively restrict the size of a position that market participants can carry at one time and are set at a level that greatly restricts the opportunity to engage in possible manipulative activity on NYMEX.”
The position limit during the last three days of the expiring delivery month on Nymex WTI is 3,000 contracts....MORE
June, 2009
How commodity indices broke the wheat futures market
I've been beating the drum on the index investors in the commodities markets (especially oil) for over a year now, see link below the headline story. From Felix Salmon at Reuters...June, 2009
... Here's a quick search of Climateer Investing for Calpers, long-only, index.
Goldman Raises Year-End Crude Forecast by 31% to $85
Always, always be skeptical of anything Goldman says regarding commodities.*July, 2009
J. Aron is one of the company's crown jewels and was the springboard for CEO Lloyd Blankfein.**...
...Goldman marketed the fact that CalPERS and other long-only index buying institutions could piggyback on GS's status as a 'commercial' to avoid position limits by entering into swaps with the bank. The institutions thought it was a sweet deal, until it wasn't. If it comes down to throwing customers under the bus or protecting the propritary trading, there's no decision.
**"When Blankfein asked about his title, a boss at J. Aron said, 'You can call yourself contessa if you want.'"
-Fortune, January, 2006
Goldman, Morgan Stanley Threatened by CFTC Review (GS; MS)
Spokesmen for both banks declined to comment, as did one from Barclays Plc. Spokesmen from JPMorgan Chase & Co. and Citigroup Inc. didn’t immediately return calls for comment....MORE
On the other hand we've never been shy about commenting, see:
June 16, 2008: Goldman, Morgan Stanley Profits Conceal Reliance on Commodities
June 25, 2008: Which Former Goldman Sachs Chairman Should We Listen to on Oil Market Speculators?
August 19, 2008: Goldman’s Oil Thesis: Timing is Everything
October 7, 2008: Goldman: We Got Our Shorts On, Oil not Going to $200.00
October 27, 2008: The Goldman Commodities U-turn, again
November 20, 2008: It’s official, Goldman capitulates on oil
December 2, 2008: Oil speculation: It's back
December 12, 2008: Goldman Cuts Oil Forecast to $45 (vs original $200) Sees Bottom
June 5, 2009: Are Goldman's Oil Swaps Clients Piling Back Into Oil?
July, 2009
Oil: the Market is the Manipulation
...Here's Chris Cook at TOD:October, 2009
...When I joined the International Petroleum Exchange as Head of Compliance and Market Regulation in 1990, the growing market in oil derivative contracts (futures and options contracts the purpose of which is to manage oil price risk) took off dramatically with the first Gulf War, and the IPE never looked back....
...The manipulation in the oil market is taking place at a different “meta” level to the Leesons and Hamanakas. The Goldman Sachs and J P Morgan Chase's of this world do not break rules: if rules are inconvenient to their purpose they have them changed....
CalPERS Playing with Fire
...In our July '09 post "CalPERS Clipped for $970 Mil. in Real Estate Fiasco" I said "It's called reaching for yield. And it's stupid, especially when a fiduciary does it."October, 2009
We have dozens of posts on CalPERS. This outfit is going to cost the taxpayers of California billions over the next decade as markets refuse to accommodate the fund's requirement of 8.5% average annual returns. They have made promises to their public sector retirees that they won't be able to meet and are trying to make up the difference by engaging in behavior that no fiduciary should even contemplate, let alone execute.
If you recall, they were one of Goldman's* largest "long-only index investors" in oil and the GSCI, scaling back only after their commodity bets lost billions. They also engaged in loser hedge fund behavior, selling their most liquid investments at the bottom to prop up their non-trading investments....
Short Interest Declines Again (and Why it Matters)
...*From our June 2 post "Markets: What Happened to the Bears?":
We are coming up on the anniversary of an event in the oil market that may bear [so to speak -ed] some resemblance to what has been happening in the equity markets.And many more.
On June 6, 2008 oil staged it's largest dollar gain in history....
...After talking to some folks who had been mauled [cute -ed] I decided that the short-sellers had just given up. It is no fun to be selling into the buying of Goldman and their long-only index clients, CalPERS, the universiy endowments et al.
So they said to hell with it. Oil continued to rise for another 33 days before peaking on July 9.
On July 29 I had this comment at Environmental Capital:
Mike @ 4:13,
Two separate thoughts in that first post.
As best as I’ve can tell approx. 40% of the move from $80 to $147 (25-28 bucks) came from “speculation”. I use quote marks because of the terminology problems most of the talking heads have when the subject is commodities. Speculators in commodity parlance take the other side of a hedgers trade, thus performing a societal good.
The problem was, until last week, the shorts had been beaten up so bad by the relentless flow of “investor” money that were out of the game. The $10.75 uptick on June 6 was their capitulation.
They covered and said screw it....
We're no blogger come lately, no sirree.
If I were a betting man my money would say that one of the big reasons that gold has moved out of proportion to oil is that GS realized that continuing the same old game in consumables would result in such a hue and cry among the citizens that the politicians would be forced to shut down the game permanently.
Rather than risk that they went to something that people didn't get price quotes on every time they gassed up, or bought a loaf of bread.
