Craig Pirrong challenges some of the common thinking around banks' involvement in commodities trading.
Who woulda thunk that commodities-especially ones like
aluminum-would become such a huge story. Maybe
it’s the summer news doldrums, but in the last
week there have been two major, related stories using up loads
of ink and pixels.
The stories are: (1) the Federal Reserve’s
announcement that it is evaluating whether to continue
permitting banks it regulates trade physical commodities, and
own physical assets like storage facilities and power plants
used to transform commodities in space, time, or form, and (2)
the role of banks like Goldman and Morgan in the industrial
metals storage business. The latter story was the subject of an
extensive piece in the New York Times. The stories are related
because the metals warehouse controversy is Exhibit A in the
case against allowing banks to be involved in physical
First the warehouse story. I wrote about this issue back in
January. There is smoke here. The premiums in physical aluminum
above the LME in-store price is an indication of a bottleneck
in getting material out of warehouses. The question is whether
this bottleneck is being artificially exacerbated by game
playing-manipulation, perhaps-by the warehouse operators. The
NYT article does cast some light on some mysterious practices,
but it does not seal the deal in my mind. Not to say that
manipulation is not occurring, just that the NYT piece
doesn’t convince me.
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