Gas Prices & Conspiracy Theory

[michael perelman <michael@xxxxxxxxxxxxxxxxx>]

Sam Smith posted this

http://prorev.com/indexa.htm

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 person in question who showed the relationship between oil and gas,
of course, is Doug Henwood, who produced the wonderful graph:
http://www.leftbusinessobserver.com/BushNGas.html

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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Michael Perelman
Economics Department
California State University
michael at ecst.csuchico.edu
Chico, CA 95929
530-898-5321
fax 530-898-5901
www.michaelperelman.wordpress.com