http://www.google.com/finance?q=AMEX%3AGSG
There's a lot wrong with this story. I'm amazed that most people here are just eating it up. Compare to the reaction to science news: if an article claims that X causes Y but the data only shows a correlation but not causation, people will always point it out. Why not be a little more critical here too?
For instance, how do we know the commodity index prices caused an increase in the price of the actual commodities, or if something else caused the price increase and the commodity index price was merely reflecting it?
Other things the article gets wrong or doesn't explain:
* the Goldman Sachs Commodity Index is just an index (and it's not even owned by GS anymore, it's owned by S&P). It's not a fund. There are funds that track it, but just creating an index doesn't do much to the market.
* he says that bankers started making financial products out of food products in the early 1990s, only to contradict (and correct) himself later but without explaining that contradiction.
* "the bankers had figured out how to extract profit from the commodities market without taking on any of the risks they themselves had introduced by flooding that same market with long orders". This is exactly what every mutual fund manager does, whether it's stocks or commodities. There's nothing new here. The fund manager will only flood the market with orders to the extent that his clients are putting money into the fund.
* "By the time the normal buying season began, drought had hit Australia, floods had inundated northern Europe, and a vogue for biofuels had enticed U.S. farmers to grow less wheat and more corn". How in the world does that support the claim in the title? Droughts and floods decrease the supply, prices go up.
I'll stop here, but there's more data about this in the Economist:
http://www.economist.com/node/16432870?subjectid=2512631&...
Investors who bought the Goldman products did eventually lose money, however not soon enough to stop millions of people from starving.
For me, the takeaway here is that tremendous wealth and power inequality creates conditions where the stupidity and inattention of a wealthy elite can easily cause the starvation, death, and suffering of the people they financially dominate.
This story has repeated over and over throughout history. Usually, it happens when a powerful person like a King or Emperor behaves irresponsibly and causes terrible suffering.
I'm reminded of Nero watching Rome burn or Stalin starving the Ukrainians.
Concentrating power and wealth in the hands of the few is a bad idea because their slightest indiscretion causes mass suffering.
> Then, like all speculative bubbles, the food bubble popped. By late 2008, the price of Minneapolis hard red spring had toppled back to normal levels, and trading volume quickly followed. Of course, the prices world consumers pay for food have not come down so fast, as manufacturers and retailers continue to make up for their own heavy losses.
The article still isn't clear (at least to me) on who took the losses for the speculators.
Though it raises some interesting ethical questions. Is it better to have the farmer subsidize the poor by not turning a profit, or is it better to have the farmer turn a profit (the goal of the business) at the cost of starvation of others?
Over the last few decades the real problem has been food is too cheap. First world governments are subsidizing food production to the point that a farmer trying to grow rice in southeast Asia can't compete with imported rice shipped from California. So that farmer moves to the city and gets a job making Nikes.
When there's some disruption in food production thousands of miles away all of the sudden people are starving because everybody is making shoes instead of growing food.
This doesn't actually protect the buyer. Rather, the buyer was protected (for a while) by the continuing influx of new capital into commodity indices which led to a continuing rise in prices -- in other words, it was effectively a distributed Ponzi scheme.
I get the feeling that there's really only one bubble, but it moves from one sector of the economy to the next, leaving destruction in its wake, kind of like Bugs Bunny used to tear up the ground as he burrowed through it.
This seems like a nice insight, can anyone with financial experience comment on it?
I'm thinking maybe if you analysed it you'd find the same subset of traders following the bubble around.