Quants Knuckleheads Are At It Again!
One would think after teetering on the brink of going under, that Goldman Sachs would be a little more cautious about investing. But alas… no. Reuters and The WSJ reveal that Goldman are accumulating aluminum metal. Could Goldman be attempting to ‘corner the market’ in aluminum. How are they doing this? Here is how;
Goldman commodities brokers are buying aluminum metal, and storing it with their subsidiary Metro International Trade Services. Metro rents warehouses to store aluminum, Metro charges Goldman rent to store the aluminum. Buyers of aluminum metal, (yes the actual metal, not the option), buy the aluminum from Goldman. Metro ships the metal and collects, shipping and handling charges. This doesn’t sound too bad, BUT WAIT!
The aluminum buyer can’t get all the newly purchased aluminum out of Metro’s warehouse, in a historically timely fashion, because Metro isn’t shipping out as much as they can. Metro is exploiting an LME rule, and is only shipping out the smallest amount required by the LME, every day. Metro ships part of the purchased aluminum and then the buyers are stuck paying rent to Metro(Goldman), on the balance of unshipped aluminum. This wasn’t a problem in the past because warehousers actually tried to ship the aluminum to the buyers as quickly as possible, not so with Metro. What used to take weeks to get delivered is now taking months. How much aluminum is this? Metro warehouses about 25% of all the aluminum, with the London Metal Exchange(LME).
Now Goldman and Metro have more aluminum coming in, then going out. Buyers are complaining to the LME about the delays getting aluminum and the increase in rents and service charges. Metro is getting increased revenue’s with higher rent and service charges to expedite shipping. The LME is working to change the rules to raise the minimum tonnage of metal shipped per day.
Everyone knows that to make money, you develop a new technology or you exploit an inefficiency or have better intelligence(data) or your the first one into a market. Clearly, Goldman and Metro have exploited the rules of the LME to their own advantage. Kudos. There are two problems worth mentioning here.
The first problem lies with the fact that they maybe cornering the aluminum market. Cornering the market is loosely defined as, “to purchase enough of a particular commodity, asset or stock to allow price manipulation.” One could argue that they aren’t actually cornering the aluminum market, but clearly their warehousing practices are allowing them to “indirectly” manipulate the aluminum market. History has shown over the last 100 years, that those who try to corner a market get burned in spectacular fashion. Anybody recall the billionaire Hunt Brothers attempt to corner the silver market in the 1970s and 1980s? No longer billionaires. Porsche trying to get control of Volkswagen in 2008? Porsche now an integrated automotive group led by Volkswagen. Onion futures, anyone?
The second problem is the US government or “you and me” are still owed money from Goldman for TARP. If the LME does not change these rules quickly and market forces cause an upheaval in aluminum prices that could leave Goldman on the wrong end of the deal. Prices are going down as the global slowdown continues. The US government may have to rescue Goldman AGAIN. In order to protect “our’ money, this could pave the way for the government to pass more laws to regulate more commodities. It doesn’t take much imagination to see arguments for the government to increase regulation of “commodities” like paper stock, integrated circuits, rare earths and Frozen Concentrated Orange Juice(FCOJ).
Yes it sounds silly, but look how well our representatives have done trying to balance the budget. Do you really want this current batch of representatives to be involved with the commodities? Don’t forget these are the same folks who passed laws making CDS and CDOs possible.