Reuters is reporting that the U.S. Commodity Futures Trading Commission has subpoenaed at least one metals warehousing firm, and the Department of Justice is probing another. Separately, aluminum manufacturers have launched class action lawsuits against the London Metals Exchange.
The concern is whether warehouse companies — many of them owned by Wall Street Banks and trading firms like Goldman Sachs or JP Morgan Chase — are manipulating prices by controlling how much metal enters and leaves the market.
Coca Cola and beer producers have made these accusations for several years.
The banks and firms that own warehouses only store the metal, they do not own it.
But two points to consider:
Warehouses do control how fast or how slow the metal can be released. Under (recently relaxed) rules of the London Metal Exchange, only 3,000 tons per day of metal are allowed out of a warehouse per day. It can take a year for that metal to leave the warehouse.
Two, some of the owners of metals in warehouses are hedge funds or other speculators who have a vested interest in affecting prices.
Goldman Sachs, in a fact sheet released via Twitter, has argued that the storage of metals helps smooth out supply and demand disruptions. It also argues that there is a “wall” between warehouses and the investment and trading parent company in terms of what information can be shared. That will be of particular interest to investigators, who have specifically asked for information on trades made on metal.
Banks point to another explanation for rising inventories of metals is the financial crisis — less people have needed the metal and have thus allowed it to stock up. Others have argued that the controversy reflects a fundamental misunderstanding about the metals market. Some metals are available on the spot market, which is to say on the everyday instant market for metals. Other markets allow you to buy metal for future delivery. The future delivery price is higher than the spot market price, which leads to frustration if you are locked into a higher price than you could be paying — or a business opportunity to buy now and sell later.
This is all very timely because the Federal Reserve in Septembver is going to revisit the 2003 law that allows Wall Street Firms to own metal warehouse operations.