Goldman Sachs Commodity Index
Encyclopedia
The S&P GSCI serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time. It is a tradable index that is readily available to market participants of the Chicago Mercantile Exchange
. The index was originally developed by Goldman Sachs
. In 2007, ownership transferred to Standard & Poors, who currently own and publish it. Futures of the S&P GSCI use a multiple of 250. The index contains a much higher exposure to energy than other commodity price indices
such as the Dow Jones–AIG Commodity Index.
The diversity of the S&P GSCI's constituent commodities, along with their economic weighting allows the index to respond in a stable way to world economic growth, even as the composition of global growth changes across time. When industrialised economies dominate world growth, the metals sector of the GSCI generally responds more than the agricultural components. Conversely, when emerging markets dominate world growth, petroleum based commodities and agricultural commodities tend to be more responsive.http://www.gs.com/gsci/#spectrum
Production weighting is a quintessential attribute for the index to be a measure of investment performance. This is achieved by assigning a weight to each asset based on the amount of capital dedicated to holding that asset just as market capitalisation is used to assign weights to components of equity indices. Since the appropriate weight assigned to each commodity is in proportion to the amount of that commodity flowing through the economy, the index is also an economic indicator.http://www.gs.com/gsci/#economic
. In a 2010 article in Harper's magazine, Frederick Kaufman magazine accused Goldman Sachs of profiting while many people went hungry or even starved. He argued that Goldman's large purchases of long-options on wheat futures created a demand shock
in the wheat market, which disturbed the normal relationship between Supply and Demand
and price levels. He argues that the result was a 'contango
' wheat market on the Chicago Mercantile Exchange, which caused prices of wheat to rise much higher than normal, defeating the purpose of the exchanges (price stabilization) in the first place.
However in a Jun 2010 article in The Economist
, the argument is made that Index-tracking funds (of which Goldman Sachs Commodity Index was one) did not cause the bubble. It describes a report by the Organisation for Economic Co-operation and Development
that used data from the Commodity Futures Trading Commission
to make the case. For example the report points out that even commodities without futures markets also saw price rises during the period.. However, counter-arguments have been made that the commodities without futures markets saw their prices rise as a consequence of the rising prices of commodities with futures markets: the World Development Movement
, a social justice lobbying organization, states there is strong evidence that the rising price of wheat caused the price of rice to subsequently rise.
Leah McGrath Goodman, a reporter with experience covering commodities markets, described an experience writing about the Goldman Sachs Commodities Index in her book "The Asylum". Around 2007, she wrote an article for the Futures Industry Association
trade magazine about the indexes. She concluded the massive amount of money in the indexes following the oil futures market dwarfed the actual oil futures market, by around 5 to 1. She alluded to the theories of Milton Friedman
, who believed that inflation was caused by "too many dollars chasing after too few goods". She concluded that the indexes were apparently thus causing oil prices to rise. Her article was dropped after a man from the FIA magazine showed it "to people around Washington" and told her it would be "politically explosive".
Chicago Mercantile Exchange
The Chicago Mercantile Exchange is an American financial and commodity derivative exchange based in Chicago. The CME was founded in 1898 as the Chicago Butter and Egg Board. Originally, the exchange was a non-profit organization...
. The index was originally developed by Goldman Sachs
Goldman Sachs
The Goldman Sachs Group, Inc. is an American multinational bulge bracket investment banking and securities firm that engages in global investment banking, securities, investment management, and other financial services primarily with institutional clients...
. In 2007, ownership transferred to Standard & Poors, who currently own and publish it. Futures of the S&P GSCI use a multiple of 250. The index contains a much higher exposure to energy than other commodity price indices
Commodity price index
A commodity price index is a fixed-weight index or average of selected commodity prices, which may be based on spot or futures prices...
such as the Dow Jones–AIG Commodity Index.
Index composition
The S&P GSCI contains as many commodities as possible, with rules excluding certain commodities to maintain liquidity and investability in the underlying futures markets. The index currently comprises 24 commodities from all commodity sectors - energy products, industrial metals, agricultural products, livestock products and precious metals. The wide range of constituent commodities provides the S&P GSCI with a high level of diversification, across subsectors and within each subsector. This diversity mutes the impact of highly idiosyncratic events, which have large implications for the individual commodity markets, but are minimised when aggregated to the level of the S&P GSCI.The diversity of the S&P GSCI's constituent commodities, along with their economic weighting allows the index to respond in a stable way to world economic growth, even as the composition of global growth changes across time. When industrialised economies dominate world growth, the metals sector of the GSCI generally responds more than the agricultural components. Conversely, when emerging markets dominate world growth, petroleum based commodities and agricultural commodities tend to be more responsive.http://www.gs.com/gsci/#spectrum
Economic weighting
The S&P GSCI is a world-production weighted index that is based on the average quantity of production of each commodity in the index, over the last five years of available data. This allows the S&P GSCI to be a measure of investment performance as well as serve as an economic indicator.Production weighting is a quintessential attribute for the index to be a measure of investment performance. This is achieved by assigning a weight to each asset based on the amount of capital dedicated to holding that asset just as market capitalisation is used to assign weights to components of equity indices. Since the appropriate weight assigned to each commodity is in proportion to the amount of that commodity flowing through the economy, the index is also an economic indicator.http://www.gs.com/gsci/#economic
Controversy
Goldman Sachs' entry into the commodities market via the Goldman Sachs Commodity Index has been implicated by some in the 2007–2008 world food price crisis2007–2008 world food price crisis
World food prices increased dramatically in 2007 and the 1st and 2nd quarter of 2008 creating a global crisis and causing political and economical instability and social unrest in both poor and developed nations. Systemic causes for the worldwide increases in food prices continue to be the subject...
. In a 2010 article in Harper's magazine, Frederick Kaufman magazine accused Goldman Sachs of profiting while many people went hungry or even starved. He argued that Goldman's large purchases of long-options on wheat futures created a demand shock
Demand shock
In economics, a demand shock is a sudden event that increases or decreases demand for goods or services temporarily. A positive demand shock increases demand and a negative demand shock decreases demand. Prices of goods and services are affected in both cases. When demand for a good or service...
in the wheat market, which disturbed the normal relationship between Supply and Demand
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
and price levels. He argues that the result was a 'contango
Contango
Contango is the market condition wherein the price of a forward or futures contract is trading above the expected spot price at contract maturity. The resulting futures or forward curve would typically be upward sloping , since contracts for further dates would typically trade at even higher prices...
' wheat market on the Chicago Mercantile Exchange, which caused prices of wheat to rise much higher than normal, defeating the purpose of the exchanges (price stabilization) in the first place.
However in a Jun 2010 article in The Economist
The Economist
The Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd. and edited in offices in the City of Westminster, London, England. Continuous publication began under founder James Wilson in September 1843...
, the argument is made that Index-tracking funds (of which Goldman Sachs Commodity Index was one) did not cause the bubble. It describes a report by the Organisation for Economic Co-operation and Development
Organisation for Economic Co-operation and Development
The Organisation for Economic Co-operation and Development is an international economic organisation of 34 countries founded in 1961 to stimulate economic progress and world trade...
that used data from the Commodity Futures Trading Commission
Commodity Futures Trading Commission
The U.S. Commodity Futures Trading Commission is an independent agency of the United States government that regulates futures and option markets....
to make the case. For example the report points out that even commodities without futures markets also saw price rises during the period.. However, counter-arguments have been made that the commodities without futures markets saw their prices rise as a consequence of the rising prices of commodities with futures markets: the World Development Movement
World Development Movement
The World Development Movement is a membership organisation in the United Kingdom which campaigns on issues of global justice and development in the Global South....
, a social justice lobbying organization, states there is strong evidence that the rising price of wheat caused the price of rice to subsequently rise.
Leah McGrath Goodman, a reporter with experience covering commodities markets, described an experience writing about the Goldman Sachs Commodities Index in her book "The Asylum". Around 2007, she wrote an article for the Futures Industry Association
Futures Industry Association
The Futures Industry Association is a trade association in the United States composed of futures commission merchants. A futures commission merchant is analogous to a broker; they are entities that accept orders and payment for commodity futures for execution on a futures exchange...
trade magazine about the indexes. She concluded the massive amount of money in the indexes following the oil futures market dwarfed the actual oil futures market, by around 5 to 1. She alluded to the theories of Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...
, who believed that inflation was caused by "too many dollars chasing after too few goods". She concluded that the indexes were apparently thus causing oil prices to rise. Her article was dropped after a man from the FIA magazine showed it "to people around Washington" and told her it would be "politically explosive".
Components and weights
| Energy | 78.65% | Industrial Metals | 6.12% | Precious Metals | 1.81% | Agriculture | 10.42% | Livestock | 3.01% |
|---|---|---|---|---|---|---|---|---|---|
| Crude Oil | 40.73% | Aluminium | 2.17% | Gold | 1.58% | Wheat | 2.75% | Live Cattle | 1.70% |
| Brent Crude Oil | 14.73% | Copper | 2.64% | Silver | 0.23% | Red Wheat | 0.67% | Feeder Cattle | 0.33% |
| Unleaded Gas | 4.62% | Lead | 0.28% | Corn | 3.12% | Lean Hogs | 0.98% | ||
| Heating Oil | 5.59% | Nickel | 0.60% | Soybeans | 1.91% | ||||
| GasOil | 4.53% | Zinc | 0.85% | Cotton | 0.93% | ||||
| Natural Gas | 5.78% | Sugar | 0.67% | ||||||
| | | Coffee | 0.46% | |||||||
| | | Cocoa | 0.19% |
Other indices
- Commin Commodity Index
- Dow Jones–AIG Commodity Index
- Reuters-CRB IndexReuters-CRB IndexThe Thomson Reuters/Jefferies CRB Index is a commodity price index. It was first calculated by Commodity Research Bureau, Inc. in 1957 and made its inaugural appearance in the 1958 CRB Commodity Year Book....
- Rogers International Commodity IndexRogers International Commodity IndexThe Rogers International Commodity Index is a composite, USD based, total return index, designed by Jim Rogers in 1996/1997. The first fund began on July 31, 1998....
- Standard & Poor's Commodity IndexStandard & Poor's Commodity IndexThe Standard & Poor's Commodity Index is a commodity price index that measures the price changes in a cross section of agricultural and industrial commodities with actively traded U.S. futures contracts, stretching across five sectors - Energy, Metals, Grains, Livestock, and Fibers & Softs. Only...