----- Original Message -----
From: Gold Anti-Trust Action Committee
To: [EMAIL PROTECTED]
Sent: Tuesday, February 06, 2007 8:08 AM
Subject: [GATA] John Dizard: Goldman Sachs and its magic commodities box
John Dizard: Goldman Sachs and its magic commodities box
Submitted by cpowell on 06:08AM ET Tuesday, February 6, 2007. Section: Daily
Dispatches
By John Dizard
Financial Times, London
via Yahoo News
Monday, February 5, 2007
http://news.yahoo.com/s/ft/20070205/bs_ft/fto020520071619273517;_ylt=As8...
Two weeks ago I unfairly profiled the Chicago speculator community.
"Profiling," in the sense of accusing or convicting a suspect based on race or
general appearances, is wrong, even in the case of such a rich and privileged
group as the "locals," or speculators in the commodities pits.
I was describing the practice known as index roll congestion, or "date rape."
This involves profiting from the requirement that public investors' positions
in commodities indices be "rolled over" from one contract month to another over
a known five-day period. The price of the old month's contract is depressed and
the price of the new month's contract is inflated. This can be a huge source of
profit for those ready to take advantage of the naive public.
In the column, I was correct to point out that index roll congestion costs
people who use indices such as the Goldman Sachs Commodity Index something in
the order of 150 basis points of return a year. Given that formula-managed
commodities index funds have $100 billion in assets, of which GSCI-linked funds
account for $60 billion, a lot of money is being lost by the public to someone.
My mistake was to look at a line-up of the participants in trading on the
floors of the exchanges and point out the suspects who wear gold chains, mink
coats and alligator shoes, instead of the clean-cut, polo-shirted, Harvard
graduate working for the famous public company.
Jim Bianco of Chicago's Arbor Trading, understood why I would have made that
assumption. "The locals are one of the few groups on the planet who are guilty
until proven innocent," he said.
The economic function of the locals, or speculators, in the view of public
policy, is to provide liquidity for hedgers who want to offset the risk of a
future requirement to buy or sell a commodity. For a price, the speculator
commits his capital to taking the risk the hedger is unwilling to assume.
Hedgers are supposed to be nice people who act for consumers; speculators are
supposed to be non-nice people who wear pinky rings, buy magnums of champagne
in nightclubs, run the exchanges and bet against the public.
I had thought that the mountain of index fund money, with its fixed, known
periods of buying and selling, would be a source of profit principally for the
speculators.
Actually, the problem is that there probably isn't enough speculative capital
relative to the huge weight of the index funds. And, one might add, firms that
manage the index funds. Firms such as Goldman Sachs.
Locals besieged me with e-mails insisting on their innocence and said that
Goldman was likely to be the principal beneficiary from the index roll. I
finally did get a response from the firm. First, Goldman pointed out that it
was not the only seller of funds -- or notes or swaps -- linked to the GSCI.
(It is, however, the largest user of GSCI-linked product). The firm said it was
obligated only to deliver the closing price on the reference days for each
commodity contract in the index.
That means Goldman knows the size and position of the target it must hit and
can, as its people say, "manage our corresponding position". That means that it
has to deliver a price at the end of the roll period. If it can cover that
obligation at a better price, it will, and pocket the difference.
While Goldman won't disclose just how good a business this is, it agrees the
business is consistently profitable. Given that Goldman knows how many
contracts it has to buy and sell on certain dates, that in many pits the GSCI
is the biggest single factor in the market and that it has many trading hours
to cover its positions at advantageous moments, its profitability is not
surprising.
The GSCI has not been as profitable for all the investors who use it to get
commodities exposure. Last year it lost about 15 per cent on a total return
basis. Goldman itself had a record year. The customers' yachts weren't just
small, they were under water.
There is no failure to disclose here since Goldman lays out the GSCI's terms
and conditions on its website and in customer contracts. The real failure is
with the institutional investing community that still does not understand how
commodity markets work.
Goldman's people and its shareholders aren't the only winners in the game with
institutional commodity investors. As one local said: "Grain companies [and
other physical dealers] are winners too because they own storage and are short
hedgers."
Also commodities funds that give some freedom to their managers to roll their
positions on dates other than when the index rolls take place can earn a
significantly better return.
But that requires the investor to concede some discretion to the manager. And
too many want a magic, automatic box that prints money. Sadly, that doesn't
exist. Unless, that is, you own an investment bank that has an ingenious
marketing department.
* * *
S&P to Acquire Some Goldman Sachs Indexes
By John Spence
CBSMarketWatch.com
Tuesday, February 6, 2007
http://www.marketwatch.com/News/Story/Story.aspx?guid=%7bCD2CFB80-DB48-4...
BOSTON -- Standard & Poor's said Tuesday it will acquire a commodity index and
two stock-benchmark families from Goldman Sachs Group Inc. Financial terms of
the deal were not disclosed, the McGraw-Hill Cos. unit said. S&P is acquiring
the Goldman Sachs Commodity Index, the Goldman Sachs Sector Indexes, and the
Goldman Sachs Technology Index, and six technology sub-indexes, according to a
statement.
* * *
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http://www.kereport.com
(Korelin Business Report -- audio)
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http://www.resourceinvestor.com
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Eagle Ranch discussion site:
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Ted Butler silver commentary archive:
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Recommended Gold & Bullion Dealers
Coin and precious metals dealers who have supported GATA
and been recommended by our members:
Blanchard & Co. Inc.
909 Poydras St., Suite 1900
New Orleans, Louisiana 70112
888-413-4653
http://www.blanchardonline.com
Centennial Precious Metals
Box 460009
Denver, Colorado 80246-0009
1-800-869-5115
http://www.USAGOLD.com
Michael Kosares, Proprietor
[EMAIL PROTECTED]
Colorado Gold
222 South 5th St.
Montrose, Colorado 81401
http://www.ColoradoGold.com
Don Stott, Proprietor
1-888-786-8822
[EMAIL PROTECTED]
El Dorado Discount Gold
Box 11296
Glendale, Arizona 85316
http://www.eldoradogold.net
Harvey Gordin, President
Office: 623-434-3322
Mobile: 602-228-8203
[EMAIL PROTECTED]
Gold & Silver Investments Ltd.
63 Fitzwilliam Square
Dublin 2, Ireland
...and
Tower 42, Level 7
25 Old Broad St.
London, EC2N 1HN
United Kingdom
Local Call Ireland: 1-850-GOLD-IE
UK phone: +44 (0) 207-060-4653
International: +353 1-632-5010
Fax: +353-1-6619664
www.gold.ie
Investment Rarities Inc.
7850 Metro Parkway
Minneapolis, Minnesota 55425
http://www.gloomdoom.com
Greg Westgaard, Sales Manager
1-800-328-1860, Ext. 8889
[EMAIL PROTECTED]
Kitco
178 West Service Road
Champlain, N.Y. 12919
Toll Free:1-877-775-4826
Fax: 518-298-3457
...and
620 Cathcart, Suite 900
Montreal, Quebec H3B 1M1
Canada
Toll-free:1-800-363-7053
Fax: 514-875-6484
http://www.kitco.com
Lee Certified Coins
P.O. Box 1045
454 Daniel Webster Highway
Merrimack, New Hampshire 03054
http://www.certifiedcoins.com
Ed Lee, Proprietor
1-800-835-6000
[EMAIL PROTECTED]
Lone Star Silver Exchange
Suite 635, 3521 Oak Lawn Ave.
Dallas, Texas 75219
214-632-8869
http://www.discountsilverclub.com
MRCS Canada
12303-118 Ave. NW
Edmonton, Alberta T5L 2K2
Canada
http://www.mrcscanada.com
Michael Riedel, Proprietor
1-877-TRY-MRCS
1-877-879-6727
[EMAIL PROTECTED]
Miles Franklin Ltd.
1001 Twelve Oaks Center Drive
Suite 1028
Wayzata, MN 55391
1-800-822-8080
http://www.milesfranklin.com
Contacts: David Schectman,
Andy Schectman, and Bob Sichel
Missouri Coin Co.
11742 Manchester Road
St. Louis, MO 63131-4614
[EMAIL PROTECTED]
314-965-9797
1-800-280-9797
http://www.mocoin.com
Resource Consultants Inc.
6139 South Rural Road
Suite 103
Tempe, Arizona 85283-2929
Pat Gorman, Proprietor
1-800-494-4149, 480-820-5877
[EMAIL PROTECTED]
http://www.buysilvernow.com
Swiss America Trading Corp.
15018 North Tatum Blvd.
Phoenix, Arizona 85032
http://www.swissamerica.com
Dr. Fred I. Goldstein, Senior Broker
1-800-BUY-COIN
[EMAIL PROTECTED]
The Moneychanger
Box 178
Westpoint, Tennessee 38486
http://www.the-moneychanger.com
Franklin Sanders
1-888-218-9226, 931-766-6066
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