Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

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

© 2005-2022 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