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Profiting from Wall Street Commodity Regulations

Can Banks Trade Physical Commodities?

Written by Brian Hicks
Posted July 23, 2013

Banks have been caught with their hands in too many commodity cookie jars, and now, the Fed is slapping them away.

goldman buildingOn Friday, the Fed announced it would begin reviewing the extent banks have been trading in physical commodities. In 2003, the Fed allowed regulated banks to trade in physical commodities, but many have taken advantage of this permission.

In 2012, 10 Wall Street banks generated $6 billion from commodities. In March, Goldman Sachs (NYSE: GS) controlled $7.7 billion in commodities, and Morgan Stanley held $6.7 billion, Bloomberg reports. It’s unknown how much revenue is from commodity trading, but one can only speculate that a large part of it derives from it.

JP Morgan (NYSE: JPM) may be facing a fine if the Senate Banking, Housing, & Urban Affairs Committee limits the storing, shipping, and owning of metal and oil. It’s possible the bank has been manipulating energy prices with its free reign.

Senator Sherrod Brown told Bloomberg:

When Wall Street banks control the supply of both commodities and financial products, there’s a potential for anti-competitive behavior and manipulation.

Banks Took Advantage of the Fed’s Grace Period

The Fed had an inkling this situation might happen because for 50 years, the Bank Holding Company Act prevented lenders from trading in commodity markets.

This, however, didn’t include investment banks, and in 2008, two of the largest investment banks, Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS), became bank holding companies. When this happened, the Fed allowed them five years to continue their involvement in metal, fuel, and other commodities. This also included the refinement, trading, and blending of commodities.

This five-year time limit will expire in September, which is a good thing – who knows how far the banks would have otherwise taken their profitable trading habits.

Commodities Trading: Changes to Watch

As banks stuck their hands in the commodities cookie jars, they were ruining the fundamental principle that banks should be separated from commerce. It’s obvious that many banks have been manipulating markets to increase profits.

With a Fed ruling that all bank holding companies no longer have the lawful right to trade materials, the world may start to see prices of commodities fall or increase, depending on how much manipulation there has been on supply and demand over the last five years.

As we approach the Fed's decision, there will be more insight into how much things will change once bank holding companies' hands are slapped out of the way. For now, the Fed is most concerned about preventing a financial meltdown due to the stockpiling of commodities such as aluminum, copper, gold, and silver.

What to Do to Protect Your Wealth

No one knows, at this point, how the Fed’s regulation in commodities will affect investors. Some may see revenue come in, due to commodities being unlawfully constrained before, while others could see a reduction across the board. These are unsettling times for sure, so what should investors do now to protect themselves as the Fed seeks control over the manipulation that has occurred?

In these uncertain times, many investors are rushing to invest in gold. Gold has held its value through the most volatile economic times. It’s a safe haven for investors when they want to protect their assets. Why?

In history, as the dollar dropped and inflation rose, gold stood strong. What’s even better is that when inflation rises – which may be the case now – gold often appreciates.

History is full of economic events that lead to uncertainty, just as the events occurring now. Investors who invested in gold were more likely to successfully protect their wealth. History tends to repeat itself, so that’s why many are turning to the gold market.

To invest in gold or silver, you have many options:

  • Bullions bars
  • Coins
  • Futures
  • Companies
  • ETFs
  • Mutual Funds
  • Jewelry

What you decide on depends on what makes you feel most comfortable. If you want to hold your investment, it’s better to go with physical gold, like bars, coins, or jewelry. If you’re just seeking something to leverage the increase in gold prices, you may decide on futures, mutual funds, or ETFs.

How you choose to invest doesn’t matter as much as what you choose to invest in. In volatile times, gold has delivered peace of mind over the years, and it will do the same now and into the future.


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