Investment Banks Caused, and Are Profiting From, Rising Food Prices

Image via WikipediaForeign Policy has a must-read story about the role that Goldman Sachs has played in driving up food prices globally. The story starts back in 1991, when Goldman planted the seeds of a trend that other institutions would follow, to the detriment of anyone who relies on eating food.
Or at least, anyone who eats who doesn't also have endless supplies of money.
The World Development Movement (a British organization) recently launched a campaign targeting Barclay's for its role in also profiting from higher food prices, as one of the three biggest players in the commodities markets (alongside Goldman and Morgan Stanley).
The Ecologist explains the World Development Movement's analysis of Barclays' involvement in food speculation:

Barclays could be generating as much as £340 million a year through gambling on the price of key commodity crops like coffee, sugar and wheat, the Ecologist has learnt. By creating funds to allow investors to speculate on the price of food, in the same way they would invest in the shares of a company, Barclays and others are able to bet on the price of food. However, food commodity trading is leading to higher and more volatile prices, say campaigners, which affect poor families in the less industrialised world the hardest as they can't afford basic foods and also make it more difficult for farmers to plan and invest. More...

Will gold ETFs shut you out?

Wade Hansen
Gold prices have been rocketing higher the past two days. Since the start of the trading day on Wednesday, September 2, gold prices have climbed from just above $950 per ounce to just below $1,000 per ounce.

To put things in perspective, gold prices have only been above $1,000 per ounce on two other occasions---March 2008 and February 2009. Gold prices reached their highest levels on March 17, 2008 (it's quite fitting that the market found the pot of gold at the end of the rainbow on St. Patrick's day, if you ask me) at $1,033.18 per ounce.

Needless to say, this is an extremely important time for gold prices. If they can break up and through resistance at $1,000, we could see an exponential rise in the value of gold. The question is, will you be able to take advantage of rising gold prices?

You see, for the past few years, individual investors have been taking advantage of rising commodity prices---like gold---by buying commodity-based exchange-traded funds (ETFs) and exchange-traded notes (ETNs) [ETFs vs. ETNs]. Commodity ETFs and ETNs track the performance of various commodity prices. So when you buy a commodity ETF or ETN, you make money when commodity prices go up, and you lose money when commodity prices go down.

The SPDR Gold Trust (NYSE: GLD)---an ETF that actually buys gold and holds it on reserve---has been a favorite of gold investors. It has been so popular, in fact, that the trust now holds more than $32 billion of gold on reserve.

But herein lies the problem. Commodity ETFs are getting so big that they are directly affecting the commodity markets---both the futures markets and the markets for hard commodities. For instance, when investors buy shares of United States Oil Fund LP (NYSE: USO), the fund managers have to go out into the futures market and buy more crude oil contracts, which pushes the price of those contracts higher.

The impact these commodity ETFs have on the futures market has caught the attention of the Commodity Futures Trading Commission (CFTC), and the CFTC is now investigating whether or not it will curb the amount of futures contracts any ETF can hold. Regulators are also looking at potential limits on the amount of gold and other commodities ETFs can hold.

So what does this mean for you?

ETFs may be forced to limit the number of shares they have available. They may even be forced to redeem shares and cut availability even further. Hopefully everyone involved will be able to figure our a solution that will allow us individual investors to maintain access to the commodities market via ETFs, but we'll have to wait and see.

Wade Hansen in an analyst for Learning Markets