Gas Prices and Conspiracy Theory

Sam Smith posted this
LE METROPOLE CAFE – In yesterday’s WSJ in Section C there is a very, very interesting item in the article, Some Investors Lose Their Zest For Commodities. The article notes that over that past few months, commodity funds have been liquidating commodity holdings. But here’s the stunner: “Consider the Goldman Sachs commodity index, one of the most popular vehicles for betting on raw materials. In July, Goldman Sachs tweaked the index’s content by cutting its exposure to gasoline. Investors tracking the index had to adjust their portfolios accordingly — which sent gasoline futures prices tumbling.”
Prior to Goldman’s July GSCI revision, unleaded gas accounted for 8.45% of the GSCI. Now unleaded gas is only 2.30%. This means commodity funds had to sell 73% of its gasoline futures to conform to the reformulated GSCI. . .
Here we have Goldman, qua keeper of the commodities index, manipulating markets simply by adjusting index components. It is noteworthy in several respects. First, we are used to the notion of them front running market sensitive information announced by third parties, but here a glorified hedge fund – albeit one dominating central banks and finance ministries worldwide – maintains market-moving indices itself. . . . Second, it lends credence to the theory that the current well-publicized commodities decline is just a well-timed, well-orchestrated head fake to benefit the incumbents in the run up to the midterm elections – someone noted recently that Bush’s ratings vary inversely with gas prices. . .


The article does not say so, but the person in question who showed the relationship between oil and gas, of course, is Doug Henwood, who produced the wonderful graph:

Zuckerman, Gregory and Henny Sender. 2006. “Some Investors Lose Their Zest for Commodities.” Wall Street Journal (21 September): C 1.

The article quotes Howard Simons, a strategist at Chicago-based Bianco Research: “The flood of money that’s come in is out of scale to anything in the past, and most were just speculators.”  There are 68 commodity-oriented hedge funds, up from 29 just three years ago, according to Hedge Fund Research Inc.  Those figures don’t include the growing number of managed-futures funds and so-called multistrategy hedge funds, like Amaranth, that also deal in commodities.

“Low interest rates made it possible for hedge funds to borrow at attractive rates and invest in almost anything.  Lead illustrates the impact: It’s basically industrial waste, the unloved byproduct of processing copper and gold.  But prices for lead — mostly used in batteries, primarily for vehicles — have more than doubled in the past five years, even though stockpiles are high.”

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