The Fed Says They Are 'Reviewing' Decision That Allows Banks To Trade Physical Commod

[indomie]

DAVID SHEPPARD AND JOSEPHINE MASON, REUTERS JUL. 20, 2013, 5:04 PM 1,831 14

NEW YORK (Reuters) - The*Federal Reserve*is "reviewing" a landmark 2003 decision that first allowed regulated banks to trade in physical commodity markets, it said on Friday, a move that may send new shockwaves through Wall Street.

The one-sentence statement suggests the*Fed*is taking a much deeper, wide-ranging look at how banks operate in commodity markets than previously believed, amid intensifying scrutiny of everything from electricity trading to metals warehouses.

While the*Fed*has been debating for years whether to allow banks including Morgan Stanley <MS.N> and JPMorgan <JPM.N> to continue owning assets like oil storage tanks or power plants, Friday's surprise statement suggests it is also reconsidering whether all bank holding firms should be able to trade raw materials such as gasoline tankers and coffee beans.

By referencing its initial decision a decade ago permitting Citigroup's Phibro unit to trade oil cargoes - setting a precedent for a dozen more banks that followed suit - the*Federal Reserve*has put in question a key profit center for Wall Street's top players, which have already seen multibillion-dollar commodity revenues shrink in the face of new regulations.

[indomie]

A Bizarre Goldman Sachs Aluminum Moving Scheme Has Allegedly Cost US Consumers $5 Billion In The Past 3 Years
ADAM TAYLOR JUL. 20, 2013, 6:20 PM 1,624 11

REUTERS/Jayanta Dey
The Federal Reserve is currently "reviewing" a landmark 2003 decision that first allowed regulated banks to trade in physical commodity markets.

Why exactly shouldn't banks be able to trade physical commodities? To see one argument, take a look at a big report from David Kocieniewski in today's New York Times.

According to Kocieniewski, a Goldman Sachs-owned company has been involved in an elaborate plan to move around aluminum in a way that has inflated market prices. The report states that every time an American consumer buys a product containing aluminum, they pay a price that has been affected by this maneuver. Sources told The New York Times that in total the plan has cost American consumers more than $5 billion over the last three years,

Kocieniewski's investigation centers on Metro International Trade Services, an aluminum storage company that Goldman Sachs bought three years ago. According to the Times, since Goldman bought the company the average wait time at the storage facility has gone up more than 20-fold. As the wait times are longer, the companies' revenues for storing the aluminium are higher. This cost is reflected in the market price of aluminum.

Aluminum storage facilities are not allowed to mindlessly sit on aluminum — industry standards require them to move 3,000 tons of the metal every day. However, according to the Times, Metro International gets around this law by moving the metal between its own warehouses every day. One analyst estimated that around 90% of the metal moved each day went to another Goldman-owned warehouse.

The body that governs the industry has shown little interest in reforming the practice, Kocieniewski writes. This may be because the body — the London Metals Exchange — collects 1% of the rent from aluminum storage facilities. Limiting the amount of rent received would cost it millions.

This all makes for a somewhat absurd working environment. Workers told the Times that they'd routinely see the same drivers making three or four round trips a day. Some warehouses reportedly sat empty 12 or more hours a day, the Times reports, despite the huge backlog.

If the practice is as the Times describes it, it is very hard to see what value is given to society by the activity. A loose coalition of companies that use aluminium — including Boeing and Coca-Cola — have begun to put pressure on Goldman. However, the issue may go beyond aluminum — JP Morgan, Blackrock and Goldman have all been given approval by the SEC to buy a large amount of copper available on the market and stockpile it, Kocieniewski reports.

[indomie]

First is gold. Now the rest of the commodities. For USD to survive, the FED must destroys commodities price in order not to lose its value.

[princess_morbucks]

First is gold. Now the rest of the commodities. For USD to survive, the FED must destroys commodities price in order not to lose its value.

How does FED devalue commodity price?
Increase the interest rate which means taper or even stop QE?

[indomie]

How does FED devalue commodity price?
Increase the interest rate which means taper or even stop QE?

The trick is to keep printing without losing value. The FED achieve this by:
1. Making the rest of the world (euro, japan, england) to print money as well.
2. Shorting the commodities (gold, alumunium, oil, etc) to increase the perceived value of USD

More desperate measure will be deployed by the FED in the coming years. But they are only buying time. They cannot increase interest rate without causing their debt to explode.

[richwang]

Those holding paper gold (including ETF gold) need to be careful.
One day Feb may "buy" it back at depressed price.