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Market Manipulation is Easy when Money is Free

Commodities / Market Manipulation Aug 03, 2011 - 05:56 AM GMT

By: Dr_Jeff_Lewis

Commodities

A concept investors had much time to ponder is the long run value of investment capital.  To calculate seemingly abstract concepts, investors have very simple answers.  The rule of 72 gives us a guideline for the doubling of money, and net present value calculators are now found on every computer with a spreadsheet program.

Calculating the rate at which money can earn a return is simple.   Finding ways to generate that return is anything but.  Further, in this period of record low interest rates, the methodology of money making has never been so twisted.


Recently, it was made public that Goldman Sachs had stockpiled literal tons of industrial-grade aluminum for the sheer purpose of speculation and investment management.  In several warehouses dotting Detroit, investment bankers reap the rewards of a very effective market manipulation scheme.

Goldman’s Aluminum Interest

Everyone knows that the future markets are a clearing center for commodities, but these financial markets are not necessarily the clearing house for all metals.  Instead only a small portion of total global production for any commodity trades on the futures exchanges, and the prices are then pushed all around the world for over the counter transactions between producer and consumer.

Goldman knows this all too well.  Each year, 38 million tons of aluminum are produced.  Meanwhile, only a portion of the production trades on regulated exchanges.  This small portion that trades on the exchange, however, will help determine prices for the majority that is shipped mostly over-the-counter.

Goldman has a monopoly on the storage of aluminum, and the massive rents that can be earned in managing aluminum for investment interest.  The company continues to take in more metals for storage than are actually necessary.  At the same time, the growing stockpiles are leaving slower than ever.  Coca-Cola, which uses several tons of metals each year to produce cans for its products, staged a campaign to remove Goldman’s monopoly.

Of course, some of the monopolistic powers have to do with the London Metal Exchange, which has allowed the company to serve as a storage provider for the market’s supply.  However, even more blame is Bernanke’s.  In keeping rates at record lows, the opportunity costs for Goldman are minimal.  The firm is better off to create artificial demand for metals in complicating the flow of metals from exchange to buyer.  Goldman can essentially hold onto aluminum, knowing that it will, eventually, be purchased from the bank, and stored in the current position—which allows Goldman to generate rental fees.

Goldman has far less interest in shipping the metal than it does in holding onto it.  Even after the metals are purchased, Goldman collects a fee on storage until it leaves, equal to 41 cents per ton.  The company can slow deliveries for as long as it desires, knowing full well that each day waiting for delivery is another day which it can earn an income on storage.

The exchange is equally complicit.  The LME allows Goldman to minimize the amount of aluminum leaving their warehouses to a defined percentage of aluminum stored.  Aluminum flows in through a faucet, and comes back out in a trickle.

What might be next?  Silver and gold become undeliverable as rental fees become lucrative enough to warrant long-term crippling of a very important supply chain?

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

    Copyright © 2011 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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