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Old 07-23-2013, 04:56 PM   #16
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Even in today's Information Technology/Business at the Speed of Thought world?
That's how we ended up with "program trading". Minor discrepancies between markets were exploited by automated trading routines.

Break up a centralized commodities market (not sure what that would accomplish) and you create a situation ripe for alternative means of profit making.
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Old 07-23-2013, 05:28 PM   #17
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That's how we ended up with "program trading". Minor discrepancies between markets were exploited by automated trading routines.

Break up a centralized commodities market (not sure what that would accomplish) and you create a situation ripe for alternative means of profit making.
I know we can never outlaw greed, but there must be a way to limit the damage it can do to others. Instead of the Separation of Church and State - we need a new rally cry - the Separation of Bank and State.

Perhaps something will organically evolve on the fringes - something like BitCoin or some other alternative. Of course, I'm still optimistic that the Age of Abundance is just around the corner - but I would rather not go through these birthing pains.
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Old 07-23-2013, 08:38 PM   #18
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AEON, to try to respond to all of your post...

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Would you agree there is currently something off with the flow of capital? - that wealth is flowing to some people/companies/investors in a historically unsustainable manner and speed?
I don't know about unsustainable (you probably are right, but I'm not 100% sure), but there's definitely something bad going on in this regard in the developed world. What exactly is the cause and how exactly to stop it, I'm not totally sure, because I'm torn on a lot of issues myself.

Let me clarify my thoughts on Goldman in this specific case, though. The reason of which I am aware (there could be others) why Goldman and other investment banks store a lot of commodities is for forward contracts, a type of derivative. Forward contracts are used to hedge against resource prices rising. For instance, Coca-Cola is heavily dependent on aluminum. If the price of aluminum today is something that they can make good profits at while charging prices that don't cause consumers to abandon them, they can sign a contract with Goldman Sachs (or Morgan Stanley or JP Morgan or Deutsche Bank or Citigroup or whatever) to lock in buying aluminum for some fixed period of time at today's prices. Under such a contract, Coca-Cola will not be exposed to price increases, but will not receive the benefits of price drops. This creates stability for both Coca-Cola and their customers, and customers of competitors, because they are most likely using these contracts as well.

The reason why Coca-Cola does this instead of just buying and storing a ton of aluminum themselves now is because Goldman has the benefit of scale, and can do this for less than Coca-Cola. Goldman does this for a bunch of other clients, and has significant infrastructure that allows them to store aluminum cheaply. There is a spread between what it costs them and what they charge, but, if it gets to the point where Coca-Cola can store aluminum more cheaply than they can get a foeward contracts, then it's irrational for Coca-Cola to used a forward contract. If Coca-Cola does so in spite of it being more expensive, then that's there own idiocy and I have no sympathy.

Even if Goldman is increasing prices with creative accounting measures, as long as they are selling forwards more cheaply than the Coca-Cola could store aluminum, then they are still providing benefit for both them and the Coca-Colas of the world. So, is what they're doing wrong and anti-competitive? Absolutely. But I don't think that the practice of selling forward contracts is bad. They provide stability at a price lower than hoarding aluminum could generate.

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This concept I'm vaguely familiar with. This is what they refer to as the "spread" - correct? Except in this particular case - they used bad accounting practices (or whatever you want to call this aluminum shuffle) to report their inventory. Do you think that banks need to actually own and control the commodity? Shouldn't they be limited to "marrying" buyers and sellers?
There's a derivative called a futures contract that does what you're suggesting here. Goldman sells them as well. Goldman can sell Coca-Cola a contract promising future delivery of x tons of aluminum at y date, and then they turn around and hedge that with a different party (or, more likely, parties) who will provide them the mathematical equivalent of x tons of aluminum at y date as well. In reality, no aluminum would change hands, but the equivalent money would flow to the right margin accounts. Goldman still charges a spread here, although this market may be more competitive, because it happens on exchanges. It's a company's choice which market they engage in, but I imagine that the forward market is somewhat cheaper, because Goldman doesn't have to worry about counterparty risk if they are storing the metal themselves (I could be wrong on this, though). Forward contracts are also more customizable, as they are over-the-counter, while futures are all sold on exchanges.

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Prices seem to fluctuate anyway - but I guess you're claiming they would fluctuate more if banks like Goldman weren't removing as much exposure that would otherwise exist.
Yes, definitely.

So, my feelings are this: what Goldman did was wrong. However, this (as in, selling forward contracts in general) is an activity that provides much stability, and is good overall for both investment banks and producers. No currently proposed regulations would get rid of it, and I wouldn't advocate getting rid of it. It's not really causing the world's problems, as least as far as I can tell. So the best course of action, to me, does not seem to be creating laws that try to get rid of forward contracts. I guess it's best to go after Goldman and others for this specific instance (I don't doubt that there's some collusion going on, which allowed this to happen). Will that actually change anything? I don't know. But I don't like the idea of trying to get investment banks to give up forwards altogether.
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Old 07-23-2013, 08:41 PM   #19
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But the argument (which is supported by pretty reasonable data) is that through this warehouse hoarding, they've actually kept aluminum prices artificially inflated.
Is that by reducing the supply so much that it affects the market/spot price, or by just increasing the cost of carry? If it's the former, then I've misunderstood everything, and disregard everything that I've said. My impression from the NYTimes article was that it's just the latter, but I could be totally wrong.
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Old 07-23-2013, 09:33 PM   #20
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Goldman posted a rebuttal to the article:

Goldman Sachs | In The News - Goldman Sachs and Physical Commodities
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Old 07-23-2013, 09:54 PM   #21
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AEON, to try to respond to all of your post...



I don't know about unsustainable (you probably are right, but I'm not 100% sure), but there's definitely something bad going on in this regard in the developed world. What exactly is the cause and how exactly to stop it, I'm not totally sure, because I'm torn on a lot of issues myself.

Let me clarify my thoughts on Goldman in this specific case, though. The reason of which I am aware (there could be others) why Goldman and other investment banks store a lot of commodities is for forward contracts, a type of derivative. Forward contracts are used to hedge against resource prices rising. For instance, Coca-Cola is heavily dependent on aluminum. If the price of aluminum today is something that they can make good profits at while charging prices that don't cause consumers to abandon them, they can sign a contract with Goldman Sachs (or Morgan Stanley or JP Morgan or Deutsche Bank or Citigroup or whatever) to lock in buying aluminum for some fixed period of time at today's prices. Under such a contract, Coca-Cola will not be exposed to price increases, but will not receive the benefits of price drops. This creates stability for both Coca-Cola and their customers, and customers of competitors, because they are most likely using these contracts as well.

The reason why Coca-Cola does this instead of just buying and storing a ton of aluminum themselves now is because Goldman has the benefit of scale, and can do this for less than Coca-Cola. Goldman does this for a bunch of other clients, and has significant infrastructure that allows them to store aluminum cheaply. There is a spread between what it costs them and what they charge, but, if it gets to the point where Coca-Cola can store aluminum more cheaply than they can get a foeward contracts, then it's irrational for Coca-Cola to used a forward contract. If Coca-Cola does so in spite of it being more expensive, then that's there own idiocy and I have no sympathy.

Even if Goldman is increasing prices with creative accounting measures, as long as they are selling forwards more cheaply than the Coca-Cola could store aluminum, then they are still providing benefit for both them and the Coca-Colas of the world. So, is what they're doing wrong and anti-competitive? Absolutely. But I don't think that the practice of selling forward contracts is bad. They provide stability at a price lower than hoarding aluminum could generate.



There's a derivative called a futures contract that does what you're suggesting here. Goldman sells them as well. Goldman can sell Coca-Cola a contract promising future delivery of x tons of aluminum at y date, and then they turn around and hedge that with a different party (or, more likely, parties) who will provide them the mathematical equivalent of x tons of aluminum at y date as well. In reality, no aluminum would change hands, but the equivalent money would flow to the right margin accounts. Goldman still charges a spread here, although this market may be more competitive, because it happens on exchanges. It's a company's choice which market they engage in, but I imagine that the forward market is somewhat cheaper, because Goldman doesn't have to worry about counterparty risk if they are storing the metal themselves (I could be wrong on this, though). Forward contracts are also more customizable, as they are over-the-counter, while futures are all sold on exchanges.



Yes, definitely.

So, my feelings are this: what Goldman did was wrong. However, this (as in, selling forward contracts in general) is an activity that provides much stability, and is good overall for both investment banks and producers. No currently proposed regulations would get rid of it, and I wouldn't advocate getting rid of it. It's not really causing the world's problems, as least as far as I can tell. So the best course of action, to me, does not seem to be creating laws that try to get rid of forward contracts. I guess it's best to go after Goldman and others for this specific instance (I don't doubt that there's some collusion going on, which allowed this to happen). Will that actually change anything? I don't know. But I don't like the idea of trying to get investment banks to give up forwards altogether.
Digitize, thank you for taking the time to explain this in more detail - I really appreciate it. I suppose it is always easy to pick on Goldman Sachs - they seem to be to poster child for that "something" we know is wrong underneath the hood. We just can't seem to get at it, and it's frustrating.
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Old 07-24-2013, 02:57 PM   #22
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Not directly related, but I think Goldman - especially how you decribed them - is certainly a major component/factor/reason for the current mess:

RSA Animate - Crises of Capitalism - YouTube
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