In 2004, the noted investor Jim Rogers released a book called "Hot Commodities". The main story was that rising populations across the world combined with rising incomes would create surge in demand for physical goods and for foods that could not be met by production. Jim Rogers did not start the commodity rally. It was beliefs such as his, that the Wall Street community began to embrace, that led them towards alternative investments. There has always been "outside money" trading in commodities. There have been both mutual funds, run by Commodity Pool Operators, and large individual accounts run by professional money managers, run by Commodity Trading Advisors, that have traded both long and short. They would seem to exaggerate price rallies and price declines but few analysts could argue the general direction of prices were that far out of line. Now, we must clarify there has always been a little bit of this long-only type buying. It was classified as speculative positions and limited to speculative position limits. The "new" group of Wall Street money found a way around position limits which we will cover near the end of this paragraph. We all know this new Wall Street money didn't care what corn, crude, or gold did individually. They simply wanted broad commodity exposure and did not want to hold 10 to 25 separate long futures positions themselves. Groups like Goldman Sachs stepped in and offered to be the middleman. GS offered returns matching general commodity indices. The Goldman Sachs Commodity Index and the Dow Jones AIG Index are the two most popular indices. The mechanics of it was…Wall Street gave money to Goldman Sachs, GS offered them the returns that matched the index, GS turned around and bought the corresponding futures positions. Goldman Sachs, and others like it, argued to the futures regulators that their long positions, normally classified as speculative positions, were in fact hedges. In a way they were hedges. They were made to lay off risk. The regulators agreed and began giving these groups individual exemptions from position limits. The massive rally in almost all commodities from 2007 into 2008 was a result of these exemptions.
Rich Nelson, Allendale Director of Research
|
|
|