Back to the Old BugBear: Goldman Sachs's Commodities Index

Speculation in food and other commodities is not fully regulated by the CFTC.  In fact, the CFTC is working still on major and minor rules that will help fulfill the goals of the Dodd-Frank bill; however, the Commission may have to face lawsuits from financial interests (what an irony!) and may have to deal with decreased funding and lack of resources which could prevent it from implementing rules that will make a real difference, not just a cosmetic one:

"Unfortunately, the CFTC-approved limits are set too high to deter speculation in excess of what is required to enable trading by commercial hedgers. The CFTC may have opted for these more modest goals as part of a legal strategy to defeat a massive Wall Street lawsuit¹ to challenge its authority to set position limits. The lawsuit also alleges that the CFTC violated the Administrative Procedures Act by failing to do a cost-benefit analysis of the position limits. The limits chosen are the historic agricultural commodity limits that have not been challenged in court for 40 years and the natural gas limit that has been in place for about a decade. Since the historic limits precede the APA, it is not clear that the APA applies to them." (from an article called Speculation Update:  Progress Report on U.S. Commodity Market Reforms by Dr. Steve Suppan and Karen Hansen-Kuhn)

The Dodd-Frank bill is not authorized to regulate index funds [such as Standard & Poor's Goldman Sach's Commodity Index (S&P GSCI)] but only portions of them, such as position limits.  Position limits restrict the number of contracts for any one trading entity and helps control speculation.

Making rules to regulate speculation is a difficult task so, in the meantime should Goldman choose to, it can speculate in food commodities to make a profit as it has done in the past:

How Goldman Sachs And Its Henchmen Are Starving The World
By Rodgzk - The Smirking Chimp
. . . .
Now, it turns out that the same banks, hedge funds and financiers whose speculation on the global money markets caused the sub-prime mortgage crisis in the 2000s (and still ongoing) are thought to be causing food prices to yo-yo and inflate. The charge against them is that by taking advantage of the deregulation of global commodity markets they are making billions from speculating on food and causing misery around the world. Oh, Oh, There’s that word again DEREGULATION. When things get deregulated some troglodyte jerk will find a way to make money. You can count on it.

So, How does this work? Well, it took the brilliant minds of those bastions (I may have misspelled that) of social conscience, the men of Goldman Sachs, to realize the simple truth that nothing is more valuable than food. You can do without just about anything except air, water and food and where there's something of value to manipulate, there's money to be made. In 1991, Goldman bankers, led by their president Gary Cohn, came up with a new kind of investment product, a derivative (remember, a derivative is a financial instrument that has no intrinsic value - it “derives” its value from the value of something else, sort of a financial leech) that tracked 24 raw materials, including cattle, corn, hogs, soy, and wheat. They weighted the investment value of each element, crunched the numbers as they are given to do, then reduced what had been a complicated collection of real things into a mathematical formula that could be expressed as a single manifestation, to be known as the Goldman Sachs Commodity Index (GSCI). While it’s still refered to as the Goldman Sachs Commodity Index, it was actually acquired by Standard & Poor's in 2007, and is technically known as the Standard & Poor's Goldman Sach's Commodity Index (S&P GSCI), for what ever that’s worth.

Read the entire article here