Goldman Sachs aluminum scandal could roil financials and commodity prices this week

Federal Reserve may force financials out of the commodity business, ending the commodity super-cycle

 

First of all, read the New York Times story. It’s an outrage.

The story of how this works begins in 27 industrial warehouses in the Detroit area where a Goldman subsidiary stores customers’ aluminum. Each day, a fleet of trucks shuffles 1,500-pound bars of the metal among the warehouses. Two or three times a day, sometimes more, the drivers make the same circuits. They load in one warehouse. They unload in another. And then they do it again.

This industrial dance has been choreographed by Goldman to exploit pricing regulations set up by an overseas commodities exchange, an investigation by The New York Times has found. The back–and-forth lengthens the storage time. And that adds many millions a year to the coffers of Goldman, which owns the warehouses and charges rent to store the metal.

Normally, I only care about what some thing like this means for the markets (and I’ll get to that) but since it’s the weekend and markets are closed I’ll afford myself an opportunity to be disgusted by this story.  The two central characters in this story are Goldman Sachs and the exchanges, you couldn’t pick two businesses that pretend to worship at the alter of Austrian economics more than those two. Goldman represents the pinnacle of financial speculation — the so-called efficient allocation of capital. Exchanges represent openness, efficiency and fairness.

I don’t have any problem with what Goldman stands for but this is the exact opposite. It’s deliberately wasting energy, creating inefficiency and exploiting it. This is the exact thing type of thing people at Goldman accuse government bureaucracies of, but this is even worse because it was done on purpose with the singular aim of driving up costs for everyone to enrich a select few.

Will there be any consequences?

It’s easy to be cynical because Wall Street has torched consumers so many times an escaped with only fines, or less. Moreover, nothing described here was illegal. But Goldman is an easy target and this time I think, Congress and the regulators will take action.

First of all, this story will stay on the front page this week because Congress is holding hearings this week on allowing financial firms to own warehouses, pipelines and other commodity-related assets. Second, late on Friday — perhaps because they got wind of this story — the Fed made a one line announcement saying it’s “reviewing” the 2003 decision that allowed banks to operate in commodity markets.

“The Federal Reserve regularly monitors the commodity activities of supervised firms and is reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies,” the surprise statement said.

The announcement came directly out of left field; the New York Times story frequently mentions that the Fed was/is happy with the decision.

The Fed appears to have no plans to require the banks to sell their storage facilities and other commodity infrastructure assets, according to people briefed on the issue.

There are also signs of panic from Goldman in the NYT story.

In filings with the S.E.C., Goldman has said it plans by early next year to store copper in the same Detroit-area warehouses where it now stockpiles aluminum. On Saturday, however, Michael DuVally, a Goldman spokesman, said the company had decided not to participate in the copper venture, though it had not disclosed that publicly. He declined to elaborate.

What will it mean for markets?

This could be a game-changer in the commodities market. This story is limited to aluminum but financials are now deeply involved in all aspects of the commodity market. The Glencore-Xtrata merger, completed only in May, was criticized as simply a scheme to exploit warehousing and supply capacity. In other words, nobody knows how deep the rabbit hole goes and if regulators get serious, traders will dump commodities and ask questions later.

Events have already been put into motion that mean the commodity super-cycle is ending but this could be one of those flashpoint events that marks a watershed. If prices have been artificially inflated, companies like Australia’s BHP Billiton have benefited tremendously. If commodity prices fall and shares of BHP drop, this could be a bad week for the Australian dollar.

If it creates broader uncertainties in the financials, it could lead to a ‘risk off’ environment. Oil could be another victim, the Brent-WTI spread was due to supply bottlenecks but now there will be questions if it was due to natural forces or something more sinister. Maybe the rapid collapse of the spread was from nefarious traders rushing to the exits?

In short, these revelations and the swift reaction point to a rough time ahead for commodities and it could spill beyond that to financials and risk trades. Steer clear of AUD and favor USD and JPY.

Author: Adam Button

Adam Button is the editor of ForexLive™. He was previously the chief currency strategist at XForex and has also worked with Intermarket Strategy. Adam believes deeply in the value of knowing every tidbit of news. He has a background in journalism and was formerly the head of the markets team at the Canadian Economic Press. He is a graduate of Ryerson University and completed Level 1 of the CFA program. Adam lives in Montreal, follow him on Twitter: @FX_Button.

28 Comments

  1. Thanks for the great post Adam..

  2. Why the surprise? Our world is now dominated by greed, manipulation, dishonesty, and deception at all levels – financial, political, corporate and personal. Honesty and integrity died a long time ago.

  3. It’s easy to be cynical because Wall Street has torched consumers so many times an escaped with only fines, or less. Moreover, nothing described here was illegal. But Goldman is an easy target and this time I think, Congress and the regulators will take action. The government will probably make a big thing out of this to take off the heat of all the scandals the administration is embroiled in like they always seem to do.When the rule of law is selective anything can happen.

  4. Just finished reading nytimes article, utterly disgusting, time and again it’s the same story with different schemes but same actors.

  5. So Adam considering all this, do you still think the U.S stock market might keep going up next week? I really hope volatility comes back.

  6. nice catch……

    and, maybe stocks are entering a parabolic blow off …….more rationale for the TAPER, if so

    revenue misses are Big, Oil is out of sight, and Bernanke is kissing (Wall St) ass, again.

    not pretty, and then throw in China

  7. Mind-boggling stuff, to say the least. And an interesting week ahead.

    Adam – apart from the obvious downside risk to the AUD, what would your call be on USD/JPY with the Japanese elections taking place today? Both safe havens looking good. Which one looks better, lol?

  8. how much impact really will this have? do you genuinely expect the AUD to tank on the back of it? I haven’t looked whether it is a slow data week yet..

  9. Thanks Adam, great rationale with this post. Be careful though as they might spin it as ‘Leave us alone, or thousands of truck/warehouse workers will go out of (artificially created) work! Shame on you!’ Personally I would welcome some episodes of risk-off – a rare sighting (genuine omg-em-markets-are-slowing-and-the-hyped-2nd-half-recovery-aint-happening ones, not small corrections from taper rumours) for over a year now.

  10. This story is known to the markets months ago. It wont catch even a brink of the market. So the idea it could impact commodities cycle and associated assets is naive imo. This story is journalistic at best but not trade-able.

  11. Great article, thanks for informing us

  12. So, disgusted at Goldman Sachs yet Forex Live is quite happy to have a former employee (Louise Cooper) contribute to this website. I’m amazed that this (the corruption within anything financial) is such a shock to you Adam. Do you honestly think the current gold price is a true reflection of supply and demand? If all you read is the mainstream press then I guess so but the alternative press has been investigating and reporting on these financial scandals long before now. Max Keiser being one of those shining a light on the dark deeds within the financial world.

  13. So you’re saying that everyone who has or is working for GS is the spawn of the devil Js?

  14. Goldman just get bad press because they make more money then all the others out there, but no doubt others will be involved in this just as much. will be interesting if this has any effect in this summer rangy market.

  15. One must question the morals of someone working for such a corrupt company –

    In July 2010, Goldman paid the biggest SEC fine ever ($550 million) for creating and selling a mortgage investment that had been secretly designed to fail. Goldman Sachs even bet against the same derivatives it was selling to clients. Goldman acknowledged that it “misled” investors, but didn’t admit to any wrongdoing.

    In April 2012, Goldman Sachs was fined a paltry $22 million for allowing investment bankers to share non-public information with Goldman’s traders and top clients. This is insider trading — and it had been going on since at least 2007. And you can bet Goldman made a lot more than $22 million trading on non-public information…

    Between 1998 and 2009, Goldman Sachs helped Greece hide its mounting debt, setting the country up for disaster.

    In November 2008, the L.A. Times reported that Goldman advised clients to short Californian Muni-bonds, which it had underwritten for $25 million.

    The list of Goldman’s misdeeds goes on and on.

  16. Js, what is your point? From what I can tell, you think, anyone who has worked at Goldman is bad beyond redemption, that the Forex Live writers thought that all finance dealings were beacons of shining light, that you think the gold price is rigged (not saying whether it should be higher or lower though and certainly not nominating a price), and that you think RT does good journalism (which I agree on incidentally). Are those points correct?

  17. JS, I dont see anything wrong about GS. This co is in the business of speculation. They have not pointed a gun on the heads of those out there that follow their calls. GS remains and will continue to be the most profitable name on the street.
    Also please notice that GS employs the best & brightest. Most GS alumni are people of high integrity including Louise Cooper

  18. > “I dont see anything wrong about GS. This co is in the business of speculation.”

    GS knowingly sold products that were designed to fail. Suppose you were on the other end of those raw deals, would you say the same thing?

    > “GS employs the best & brightest”

    If those people only use their talents to rig the economy, then they are morally corrupt so I don’t care how bright they are.

    The ultimate problem is that it’s a zero-sum game where some companies do something that is actually useful in the society, while others like GS drive trucks of aluminum back and forth, and create products that will cause financial ruin. They are a disease on the society and the sooner they are dismantled the better for everyone.

  19. New York is Democrat, Jewish are Democrat, college-programmed are Democrat, Ruben and Corzine are Democrats, Goldman is Democrat. They have always been about Mexican and AIG bailouts, new laws and regulations that they could take advantage of (and often write themselves), and using their web site to help their political lobby. They have never been about free markets. Goldman has always been a boiler room, and always better at selling than anyone who might point this out. If Goldman hires to some top physicist or programmer, it is only in the way that a bank robber buys a Ferrari with his loot. They are all about sales and government favor.

  20. in all fairness, JPMChase and Jamie Diamon deserve some credit too….Matt Taibbi

    http://www.rollingstone.com/politics/blogs/taibblog/chase-once-considered-the-good-bank-is-about-to-pay-another-massive-settlement-20130718#ixzz2ZQq176Ev

    “During the financial crisis, while Dr. Evil-ish Wall Street villains like Goldman and Lehman Brothers were getting all the bad press, pundits continually referred to J.P. Morgan Chase as the “good bank.””

  21. Best article I’ve ever read on Goldman was the “vampire squid” one in Rolling Stone magazine probarbly findable via google, can’t agree with all but v good journalistic piece, recommend it to anyone who hasn’t read it

  22. I can’t see this having much of an impact on the markets. Other than adding to the mistrust people have of Wall Street. Unless the Fed states that financial firms are not allowed to be involved in commodities. I really doubt any Fed would want such a thing to happen. Each country is experiencing a deflation or stagflation removing financial companies from the commodities would devastate the value of all commodities and thus creating large world wide deflation.

  23. This is why in many circles this firm is known as “Goldenman Sucks”. The article you brought forth today reinforces this most fitting name.

  24. Lets see the Fed prints lots of devalued money…pretty much free to the banks, Who are not supposed to prop trade any more.; but commodities for the past decade or more have been treated as an “asset” class and funds have been created and pumped up through buy side only — driving input costs up for any “real” producer and “end consumer” who need low input costs to be competitive and attractive. Infrastructure is too costly too repair Joe Blo can’t get cheap fed money and can’t afford high commodity prices and The Fed wonders why job creation is slow and money doesn’t circulate thru “our” economy. The only economy there is exclusively shared between the Fed, the banks and market participants…it’s a closed loop; any “trickle down” one may feel… is urine.

  25. … or worse

  26. I wouldn’t be surprised if the government doesn’t come down hard on Goldman Sachs .This administration doesn’t like success ,unless its GM Government Motors ,or GE Government Electric ,or Goggle.

  27. I am using much similar Aluminum Manufacturers, In Bangalore. ,  I thank you for the detailed information about this Industry.

    Aluminum Manufacturers In Bangalore

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