Goldman Sachs & the Metals Markets

I had to laugh when I read Tuesday's Wall Street Journal piece headlining the Money & Investing section- Commodities Beckon Banks.

Essentially, several firms, including Goldman, Chase, Trafigura & Glencore, are linking possession of massive amounts of metals including aluminum, copper, zinc, tin and nickel with their trading operations, thus allowing them to conduct some market squeezes. These firms recently bought metals warehouse operations which serve as custodians of LME-traded metals. According to the Journal piece, these four firms now own warehouses which store "about two-thirds of the LME's entire metal stocks, from aluminum to zinc."

This passage from the article says it all,

"But the growing muscle of securities firms in the metal-storage business is riling users and traders, who say the firms have both a bird's-eye view of supply and demand and the ability to control what goes in and out of their warehouses. These traders worry the firms could exploit their knowledge. The new owners say they keep their trading arms and warehouse operations separate, and there is no evidence to suggest they share information."

Does anyone really believe that? I sure don't. First, Goldman's involved- so you automatically suspect them of finding a way to coordinate trading and supply, even if the two operations don't "share information" directly.

Second, why else on God's earth would these firms buy the warehouses if not to take advantage of the potential to coordinate trading moves and availability of physical supply of these commodities?

The Journal piece mentions Goldman's Detroit aluminum storage sites as being curiously coincident with the higher prices for the metal there than in London. It's contended that those Goldman's Detroit metals warehouses store 25% of the LME's aluminum.

Incredibly, LME rules and Goldman's own procedures allow them to delay the release of stored metals which owners sent there for safekeeping. It's quite clearly the basis for an artificial supply squeeze by Goldman. Reading how the arcane procedures for releasing metals from warehouses to the metal's owners under LME rules makes you see that it was a situation ripe for manipulation.

And it seems that's exactly what is going on.

Oh, and while we're on the subject, does it strike anyone else as odd that Chase and Goldman Sachs, both 'too big to fail' taxpayer-supported and -insured commercial banks, are involved in this? Funny, because this doesn't sound like a classical, conventional commercial banking business, does it?

No, it sounds more like the sort of risk-arbitraging, market-manipulating enterprise that a brokerage, investment bank or private partnership would run.

Truly, you cannot make this stuff up, can you?