Goldman Sachs, aluminum and why Wall Street is hoarding metal -

Goldman Sachs, aluminum and why Wall Street is hoarding metal

It’s a strategy that no longer makes sense


Detroit has been in the business papers a lot lately — and not just in bankruptcy-related news. In a less prominent but still widely read story, the New York Times zeroed in on the city’s metal warehouses a couple of weeks ago to denounce the role that a subsidiary of investment banking giant Goldman Sachs has reportedly played in inflating aluminum prices.

If you haven’t read the article yet, here’s the story in a nutshell. In 2010, Goldman bought a company called Metro International, which owns many metals warehouses in the Detroit region. Metro has been sucking in aluminum (and often paying customers incentives to store their metal there), but only allowing a trickle of it out, while charging rent for keeping the stuff in storage. This hoarding of metal has created a tightness in the local market for aluminum that has kept prices artificially high. Unsurprisingly, major aluminum buyers like Coca-Cola and Miller Coors are unhappy — and so too, argues the Times, should be consumers, who pay more than market prices every time they, say, buy a can of pop.

Those are very legitimate gripes and regulators should address them. But, as Izabella Kaminzska of the Financial Times’ Alphaville blog points out, there is a larger game at play. Before the financial crisis, Goldman did not own Metro International. And J.P. Morgan, for that matter, did not own Henry Bath, another giant warehouse operator, based in the U.K. So why did large banks suddenly take such a shine to metal warehouses?

A key motivation was the emergence, in recent years, of a significant gap between current commodity prices (spot prices) and futures prices. In the aftermath of the Great Recession, the industrial downturn around the world created large surpluses of various commodities, particularly metals. This put pressure on the spot prices of commodities. At the same time, partly spurred on by the banks’ cheerleading, investors like pension funds and university endowments continued to park some of their money in commodity markets. In doing so, they put upward pressure on futures prices. Thus, futures prices rose relative to spot.

Why would such staid investors do such a thing, you ask? As Reuters’ John Kemp has explained, pension funds were convinced that commodities (technically commodity futures) were useful for diversification, and that natural resources provided protection against the risk of high inflation at a time when many central banks around the world were trying to jump-start their economies through extraordinarily lax monetary policy. I would also add that commodity investments have been seen as a play on the economies of the so-called BRICs.

Let’s take a close look at how the game works. Say you’re a Goldman Sachs or one of its large hedge fund clients. Suppose the current price for aluminum is $2,000 a tonne and its price a year out is $2300 a tonne. What do you do? You buy the metal for $2,000 and sell it forward a year out for $2,300, naturally. As long as the price difference amounts to more than your storage and financing costs, you’re guaranteed to make money. Someone, of course, needs to be playing the role of the fool on the other side of the trade who buys metal at $2,300. That sucker would be the pension funds.

Sure enough, what seemed a golden (pardon the pun) opportunity just a few months ago, is starting to look like a liability as widespread slowdowns among emerging economies put downward pressure on commodity prices. Lots of people stand to lose lots of money.

If it’s any consolation, the wind, it seems, is finally turning for the Goldmans and J.P. Morgans of the world, too. Complaints from titans like Coca-Cola and bad press from oulets like the Times, are focusing Congress and the public’s attention on the pitfalls of banks owning commodity infrastructure. It certainly does not help that J.P. Morgan has just agreed to pay a US$410 million fine for allegedly manipulating U.S. electricity markets.

Most importantly, though, long-term investors have started to flee commodity markets — and without someone willing to overpay today for tomorrow’s metal, the hoarding strategy doesn’t work.

Andrew Hepburn is a former hedge fund researcher and commodities bear. Follow him on Twitter at: @hepburn_andrew



Goldman Sachs, aluminum and why Wall Street is hoarding metal

  1. One of the many wonders of Capitalism.

    • This isn’t capitalism, it is market price fixing and racketeering. But maybe time to capitalize on it as like all cartel like bubbles they burst. Maybe time to place some well thought out shorts.

      • Maybe it’s time you took your cartels to bed

  2. And these are the same guys who floated the giant mortgage bond/CDS fraud that caused the Great Recession and the global economic crisis, and the same people who want to control carbon trading.

    The banksters want to financialize the entire real economy (free money, bailouts, and zero percent interest rates from the Fed are not enough for them) and create new rentiers income streams (private taxes) for the 1%.

    Hank Paulson went straight from bailing out the banks to a carbon trading company. Carbon trading was going to be the next great bankster fraud (as carbon trading has been demonstrated to be in miniature in Europe).

    • None of that caused the ‘Great Recession’….they were just caught swimming nude when the tide went out. Tipping point, last straw….etc

      • The real cause no one wants to talk about is the change in monetary policy when Bernanke got in. Because after the money print for debt ponzi scheme got started, currency value changed and was followed by the credit crisis and unemployment:

        But it isn’t popular to discuss the facts. But money print for debt is like you and I paying our bills with photocopied money as no one will lend to us. Only legal as governemtn and US Fed do it. Same happens in Canada with BoC and Ottawa.

        Its also why governments can’t solve the economic problems, its their pyramid debt ponzi fraud policies causing the problem through currency devaluation and inflation pressures.

        • The ‘real cause’, REAL women, ‘real’ conservatives….kindly stop posting rubbish. Even Palin made more sense.

    • Yep, they are the same. Also the onces that get cheap 0% US Fed money to buy US Treasury bonds no legitimate lenders are buying. All to prop up the perception that the US governemtn is solvent when it is not. Sort of why Obama will not go after GS in a serious way. When noise occurred, GS leaked:

      I wonder what else GS has up their sleeve?

  3. Could be they are hoarding it for an Obama war. Plus, USD is declining in value with non-G8 countries. And this means real metal holds value more than USD fiat funny money.

    As Bernanke prints $85 billion of no value fiat money per month, it dilutes the US currency. At some point like Japan had in the last year, it can generate a rude amount of inflation. A good way to preserve value is to own and hoard metal.

    Used to be you would pick real-estate but with pending property/utility tax greed, metal is safer as not much taxes on a 100 tons of nickel, aluminum or copper. Or perhaps US government asks them to do it as if a big enough war broke out the stuff will be in a shortage position.

  4. Just waiting for someone from ZeroHedge to fly in and scream “Gold, Bitchez!zz” Anytime now…

    • It was the same thing, putting money into a metal instead of a some manufactured paper asset.

      I’m surprised that the article didn’t say anything about the reasons that pension funds were investing like this. The yields on any safe investment are far below what these funds require to meet their obligations.

      • Agreed.

        Re: ZeroHedge.

        Don’t get the wrong idea. There are smart people who actually know stuff on Zerohedge. So, not knocking on them as a whole. Some of the commentariat therein are…erm…overly enthusiastic about ‘My Precious’. They like the cold hard facts of life. Metal. *Does devil horns*.

  5. The pen is truly mightier than the Tommy gun..

  6. Pensions fund have got to be up this year and should be in pretty good shape. Not the banks and hedge funds want some if not all of it back. Shame