Goldman Sachs Is In The Right Place Again!
I posted earlier today about the surge in Corn prices. This evening I came across a June article in Business Insider titled How Goldman’s Control of Market Structure Might Literally Starve Us
In 2008, before the financial system almost melted down and threatened an economic collapse of biblical proportions, some very odd events occurred in the market for commodities derivatives. It is now clear that financial institutions and investors already understood that the mortgage market was teetering and that severe problems for the financial firms were on the horizon. Stress was building, but how did this relate to the commodities markets? We still do not know for certain, but we do know that it coincided with peak investment levels of $317 billion in several investment vehicles known as commodity index funds.
Goldman in 1991 set up a commodity index fund (GSCI) that would take in funds from clients and invest the proceeds in futures contracts, a portfolio of energy, agricultural, minerals and financial contracts. The fund would only be long the commodities and would roll over. This rolling over into the next contract month ” he fund became infinite, a rolling investment in an index of prices for commodities that never had an end date. Goldman made lots of money from fees and float, with a side benefit of increased volatility in commodities. Traders love volatility!
The big reason investors wanted into an indexed commodity fund is the inverse relationship between the equity markets and commodities.
If you believed that equity prices were going to go down (or if you wanted to hedge exposure to the stock market), you could make money by buying the index.
see Goldman Sachs Index (GI, CME) chart
The chart of the GSCI, IMO, looks like a head and shoulder bottom and the neckline comes through at about 515. This an index to watch for a clue to the equity markets’ behavior.
Tags: Goldman Sachs commodity index funds Business Insider Hunger In America
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