Posted by: Dirk | May 5, 2011

What is driving prices of primary goods in 2011?

In a recent article in Foreign Policy Frederick Kaufman claims that ‘Goldman Sachs Created the Food Crisis‘. It seems that Goldman Sachs created a possibility to go long in primary goods without allowing to go short. This seems very similar to the US subprime mortgage market, where those that tried to bet against rising prices could only do so after finding the right people to start the market (which is the story of ‘The Big Short‘). Here is what Kaufman concludes:

The result of Wall Street’s venture into grain and feed and livestock has been a shock to the global food production and delivery system. Not only does the world’s food supply have to contend with constricted supply and increased demand for real grain, but investment bankers have engineered an artificial upward pull on the price of grain futures. The result: Imaginary wheat dominates the price of real wheat, as speculators (traditionally one-fifth of the market) now outnumber bona-fide hedgers four-to-one.

There seems to be no quick fix since investors could go abroad and continue their activities there. What this episode shows, though, is the breakdown of a financial system which is obviously not able to come up with enough investment opportunities. This is either a failure of the financial market and/or a problem that there are too many people who want to save and not enough people who either want to go into debt or are allowed to. By the way: Lucas van Praag, Managing Director, replies to the allegations, and Kaufman then replies to that (both here). Be your own judge.

Meanwhile, the German weekly DER SPIEGEL reports today on the silver market, where prices have been tumbling downwards over the last few days. Here is what it says:

Experten führen den jüngsten Wertverlust vor allem darauf zurück, dass wichtige Börsen ihre Sicherheitsleistungen für Terminkontrakte zuletzt mehrfach und spürbar erhöht haben. Diese Zahlungen müssen Anleger als Sicherheit hinterlegen, wenn sie Silber auf Termin kaufen wollen. So hatte die New Yorker Warenterminbörse Comex erst am Mittwoch abermals eine Anhebung der Sicherheitsleistung für Silber-Kontrakte angekündigt.

So, experts say that the silver price is coming down because of a rise in the amount of collateral one has to put up before being able to buy and sell futures. I wonder if Goldman Sachs lets you play the futures market without putting some money on the table up front. There will be blood margin calls.


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