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Goldman Sachs Aluminum Investing

Written By Brian Hicks

Posted August 1, 2013

What’s going on with Goldman Sachs (NYSE: GS)? Just recently, JP Morgan & Chase (NYSE: JPM) came under heavy scrutiny for its manipulation of energy markets in California and the Midwest, and the bank agreed to pay a record fine.

aluminumNow, it looks like it’s controversy time for Goldman Sachs, which has decided to speed up aluminum delivery and make some systemic changes amidst charges that the bank had intentionally held up deliveries to create shortages and drive up prices.

CNBC reports that yesterday, Goldman Sachs decided to increase the size of aluminum outflows from storage under the London Metal Exchange rules and impose priorities for metal consumers over others. In addition, it would make exceptions for consumers demonstrating urgent need, allowing them to step ahead in line, and generally improve transparencies all around.

Goldman, along with JP Morgan, had already come under close scrutiny over suspicions that these financial institutions have been tinkering around with commodities with the intent to artificially drive up prices. The major complaints include excessive wait times, which are a crucial loss-maker for customers.

Why are we warehousing metals in the first place? After the financial crisis, interest rates dropped very low. As a result, investors bought up metals with the intent of selling them later at attractive rates, when the cost of selling exceeded the cost of storing. Thus, inventories expanded.

Then investors tried to retrieve their stored metals in order to execute new carry trades at warehouses outside the London Metal Exchange system. As a result, aluminum took a hit—its wait times increased, and this increased the premium for the metal.

Nonetheless, it’s probably worth noting that aluminum overall is down 40 percent since 2006.

CNBC quotes Goldman’s defense (of sorts):

“The warehousing system is not driving up the price of aluminum, but, as a price-setting mechanism, is a factor into setting the physical premium over the spot price,” Goldman said.

The unit under scrutiny is Metro International Trade Services, which Goldman bought in 2010. It’s a metal warehousing company over which Goldman denies any direct supervision. The company said it would sell the unit at an appropriate time.

As a response to the questions being tossed at them, Goldman has said it will contact customers to swap aluminum being held in warehouses for immediately-available metal, reports the Wall Street Journal.

The general scrutiny of financial institutions with regards to metal-holding that I mentioned above comes courtesy of the Senate Permanent Subcommittee on Investigations, which is leading inquiries into JP Morgan, Goldman, and Morgan Stanley (NYSE: MS). On the table are further oversight and regulation and some issues relating to mandatory disclosure.

Goldman Faces Controversy

The most visible instance of such egregious delays appears to be in the case of MillerCoors, which ended up waiting for one and a half months for a certain delivery of aluminum. It looks like it takes the prospect of beer running low to spur the government into action.

In any case, given the intricate and close relations between the value of metals and the various financial market bets placed on them by financial institutions, the natural question arose as to whether these institutions might be manipulating variables toward their gains. In other words, were they holding on to the metal unnecessarily, purely in order to inflate prices afterward?

Forbes has a particularly provocative piece on the matter, alleging that Goldman could in fact be holding some 25 percent of all the aluminum that’s available for delivery in the nation. Oddly enough, despite Goldman’s claim that it has reached out to customers offering an immediate delivery of aluminum, it seems none of these customers has taken them up on the offer. Overall, though, last year saw aluminum costs rise by $3 billion globally, even as stockpiles in warehouses reached record levels.

Despite all the controversy, Goldman has not made any comments about getting out of the commodities business. That may change, of course, if the heat intensifies. But will it? It’s uncertain.

What we do know is that the government has taken a serious interest in examining just what it is these major financial institutions are doing with commodities. According to CNBC, Goldman President Gary Cohn has reiterated his commitment to fair practices and to staying on in the commodities sector.


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