Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Goldman Sachs' "Warehouse Shuffle" Just Cost You $5 Billion

Commodities / Market Manipulation Jul 25, 2013 - 02:27 PM GMT

By: Money_Morning

Commodities

David Zeiler writes: It's just another game for Goldman Sachs Group (NYSE: GS) - a "warehouse shuffle" that moves aluminum around while the big bank collects rent on the metal.

Although the rent on the stored aluminum - Goldman isn't allowed to actually own the commodity - is just pennies a day, the vast amount of the metal it has stored in its 27 Detroit warehouses and the "warehouse shuffle" strategy that enables it to extend the rental period for months on end adds up.


Through the Metro International Trade Services subsidiary it bought in 2010, Goldman has accumulated 1.4 million tons of aluminum, which it stores at about 48 cents per ton per day. That's about $672,000 per day of revenue - nearly half a billion a year.

Experts say the warehouse shuffle game ultimately raises the price of aluminum to manufacturers - everything from beer and soda companies to automakers. That extra cost, about $5 billion over the past three years, is passed on to consumers - you and me.

"What Goldman is doing is a new twist on an old game, it's called daisy-chaining," said Money Morning Capital Wave Strategist Shah Gilani, who wrote on this topic himself on his Wall Street Insights and Indictments web site. "The story here is that Goldman is allowed, by the Fed and the SEC and Congress, to own these warehouses in order to get around rules governing storing metals to prevent price manipulation to manipulate the price of aluminum higher, which costs us all more."

And Gilani isn’t happy about it.

“Talk about redistribution policies, this is the same old game with a newer twist: Take from the middle class and give to the biggest, richest banks so they can pay their legal bills and settlement fines to keep the coffers of politicians full. It's sickening,” he said.

Anyone who watches the Big Banks of Wall Street will not be surprised to learn that Goldman isn't the only bank playing the game, and aluminum isn't the only commodity they play with...

How the Goldman Sachs Warehouse Shuffle Works

Although the banks can't own the commodities themselves, they can store commodities for others and charge rent.

That's why Goldman bought Metro International in 2010. That same year Swiss-based Glencore International bought Italy's Pacorini for the same reason. Glencore does the same warehouse shuffle at its facilities in the Netherlands.

Metro immediately started stockpiling aluminum, with its stores rising from 50,000 tons in 2008 to 850,000 in 2010 to 1.5 million now.

The entities that own the aluminum, like the beer and soda companies, pay companies like Metro to store their aluminum until they need it.

Before Goldman bought Metro, it only took about six months to get aluminum out of a Metro warehouse; since 2010 the wait has stretched to 16 months or more, with Goldman collecting rent all the while.

According to the London Metal Exchange, the rule-making body that oversees 719 metal commodity warehouses around the world, warehouse operators are required to move at least 3,000 tons of aluminum out every day.

At Metro, that means loading trucks with aluminum from one warehouse and moving it to another warehouse, then reloading the truck with different aluminum for transport back to the original warehouse.

The metal moves, as per the rule, but stays in Metro's control. Not only does this warehouse shuffle generate rental income for Goldman, but keeping large amounts of aluminum in storage has caused the spot price for the metal to double since 2010.

"It's a totally artificial cost," Jorge Vazquez, managing director at Harbor Aluminum Intelligence, a commodities consulting firm, told The New York Times. "It's a drag on the economy. Everyone pays for it."

Why Goldman Sachs Gets Away With It

While many have complained about the warehouse shuffle and its impact on aluminum prices, it's all completely legal. And Goldman has denied that it delays aluminum shipments on purpose.

But those who should be doing something about it have mostly stood by doing nothing.

The London Metal Exchange, which could create more stringent rules, until last year was controlled by its members -- you know, big banks like Goldman Sachs. What's more, the LME gets a 1% cut of all warehouse rents worldwide, so it has an incentive not to rock the boat.

The new owners of the LME have proposed some new rules to take effect in April 2014 that they say would curb the warehouse shuffle. But it may well turn out that the new regulations, like the rule requiring 3,000 tons move per day, will be just as easily dodged.

In the U.S., no government entity seems particularly interested in cracking down on Goldman's aluminum shenanigans.

Indeed, they allowed it to happen. The Federal Reserve and Congress loosened restrictions in the 1990s that previously prevented Big Banks from having anything to do with managing physical commodities.

The Commodity Futures Trading Commission, meanwhile, claims it has no jurisdiction over Goldman's activities because the actual trading occurs in London.

The Senate Banking Committee held a hearing Tuesday to gather information from several critics of the warehouse shuffle, but it's a Grand Canyon-sized gap from a hearing to enacting legislation.

Business as Usual for the Big Banks

The same rules that allow Goldman to play games with aluminum also allow the Big Banks to dabble in other commodities.

Experts have estimated that similar games with oil, where the Big Banks can own warehouses, tankers, pipelines and other infrastructure, cost consumers $200 billion a year.

"When Wall Street banks control the supply of both commodities and financial products, there's a potential for anti-competitive behavior and manipulation," Sen. Sherrod Brown, D-OH, a member of the Senate Banking Committee, told the Huffington Post. "It also exposes these megabanks -- and the entire financial system -- to undue risk."

Another expert, Joshua Rosner, managing director at independent research firm Graham Fisher & Co, has warned that letting Big Banks manage physical commodities encourages the sharing of inside information with their trading desks, who often make big bets on derivatives tied to commodities.

"If banks own storage, distribution, transmission or generating assets, they have the ability to manipulate prices for the benefit of their own balance sheet, to the disadvantage of the public interest, which is why they were prohibited from such activities after the Great Depression to the passage of Gramm-Leach-Bliley in 1999," said Rosner, who also testified at Tuesday's Senate hearing.

Despite the protests, it's likely that the Big Banks will continue to get more heavily involved in commodities.

In fact, they've already identified another industrial metal that could become far more lucrative than aluminum: copper.

But given what's happened with aluminum and the warehouse shuffle, investors should have learned a lesson - it's better to play along with the Big Banks than to fight them.

Source :http://moneymorning.com/2013/07/24/goldman-sachs-warehouse-shuffle-just-cost-you-5-billion/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in