The article is meaningless because skips over two big points:
First, for all those long only positions, for each of them, there needs to be a corresponding short position. The article never explained where all those short positions will come from.
Second, the article said that when the futures contracts expired and there was settlement, the funds would just "roll over" their positions, that is, by selling their long positions in the expiring contracts and buying long positions in the next contract.
The problem is, just why can the funds be sure not to lose money during this roll over process?
Or, if wheat should sell for $5 a bushel and some fund bought wheat at $100 a bushel and doesn't want to take delivery, then the fund needs to sell the wheat they bought (and would take delivery on), and who's going to pay them $100 a bushel for their wheat (position)?
But prices have gone up. I just suspect that there's more to the system than in the article.
First, for all those long only positions, for each of them, there needs to be a corresponding short position. The article never explained where all those short positions will come from.
You might have glossed over the food section of the article - it discusses exactly that.. basically, that the market has transformed from a balance of long- and short- positions to only long, made possible because regardless of whether the price went up or down, the big names would make money (if prices went up, they make money the normal way, and if prices went down, they make money via their profits gained through replication).
So long as corporations like Goldman Sachs are making this sort of crazy money regardless of whether prices go up or down, you're going to be in a world of hurt.
I get that Goldman Sachs et al are making crazy money whether prices go up or down, but investors in their funds only make money if prices go up, right? They lose money if prices go down, don't they?
So if commodity prices go down in the long run, why does anyone invest in a commodity fund long term?
That's where it gets crazy/wrong - since Goldman is "buying" regardless of whether prices go up or down, it has the effect of artificially providing feedback that triggers higher prices regardless of anything else.
So even if the investors lose a little in day-to-day trading, in the long-run, they're gaining because contrary to what logic says, the prices aren't going down in the long run, they're actually going up (at least until the bubble explodes).
Basically, if we all agree to continue buying something at whatever price it's at regardless of whether we're losing or not, in the long run, we'll drive the prices higher and our own (as investors) profits with them. And then the bubble bursts... only to start over again.
>That's where it gets crazy/wrong - since Goldman
>is "buying" regardless of whether prices go up or down,...
That's not how futures markets work though. If someone else said, you can only go long in a contract if someone else goes short. You can put in a BUY order, but until it matches someone else's SELL it just sits there in the market.
This is because futures don't work like stocks or shares, or even actually buying a commodity now and sitting on it. This is why some banks rent supertankers full of oil - they can't achieve the same hoarding effect on a futures exchange.
Yes, prices go up until the bubble pops, at which point fund investors (but not Goldman) lose lots of money. Was the low point post-bubble above pre-bubble prices?
Wasn't me that downvoted you, mate. But anyway, that's a difficult question to answer and the response could go either way - it all depends on when you officially define the bubble to have started/ended.
What pisses me off the most about the article is that Goldman Sachs seems to have such a large influence on the regulatory body.
They had a subsidiary company sent a letter to the commission asking for exceptions to the rules.
The head person at the commission was someone who actually worked for Goldman Sachs before and after (maybe even during) working at the commission. And they approved this.
When someone inquired about these exceptions they eventually says: ‘We have to clear it with Goldman Sachs.'
No, quite literally and exactly, the exchange does not buy or sell and only connects buyers to sellers. If you buy a wheat contract, then that means that someone sold one. Maybe the Goldman Sachs fund is long only, but the exchange is not. Again, the number long contracts and short contracts are equal. Again, for all those long Goldman Sachs fund contracts, there has to be someone selling a short contract.
You are on the right track. As far as I understand, if you're long for one delivery (e.g. for March) and then "roll over" you're selling the delivery for March to somebody else and that one has to actually take over the oil scheduled for March delivery. The commodity can't just disappear. The only ones who wouldn't have to receive the contracted goods would be the original sellers. If the price raises, that means that the sellers would lose the money by buying the contracts back near the expiration of the contract. As far as I understand, the oil is constantly delivered even when the prices rise and the article author is just confused, so his conclusions are invalid.
First, for all those long only positions, for each of them, there needs to be a corresponding short position. The article never explained where all those short positions will come from.
Second, the article said that when the futures contracts expired and there was settlement, the funds would just "roll over" their positions, that is, by selling their long positions in the expiring contracts and buying long positions in the next contract.
The problem is, just why can the funds be sure not to lose money during this roll over process?
Or, if wheat should sell for $5 a bushel and some fund bought wheat at $100 a bushel and doesn't want to take delivery, then the fund needs to sell the wheat they bought (and would take delivery on), and who's going to pay them $100 a bushel for their wheat (position)?
But prices have gone up. I just suspect that there's more to the system than in the article.