The Commodity Futures Trading Commission had its inaugural meeting of the Energy Markets Advisory Committee Tuesday. The focus was clearly on Donald Casturo, managing director of Goldman Sachs.
The reason, of course, is the existence of the Goldman Sachs Commodity Index, a tool for institutional and individual investors to invest in commodities without holding physical positions. (Full disclosure: the GSCI is now owned by Standard & Poor's, like Platts a division of McGraw-Hill). But even though Goldman doesn't own the GSCI anymore, it manages the largest amount of money under its umbrella, though other firms can use the GSCI investment model through agreements with S&P. Index investing was the key topic discussed at the meeting.
The committee consisted primarily of representatives from trade groups of energy users and Wall Street houses other than Goldman. Early in the hearing, Casturo faced the thinly-veiled accusation that has popped up repeatedly: are Goldman Sachs traders getting tipped off in advance by predictions about to be made by Arjun Murti, the company's oil equity analyst whose bullish predictions on the price of crude, highly accurate in the last year, have made him a bit of a cult star. Casturo repeated what Goldman has said numerous times: there are walls between the groups and there is no advance knowledge of an impending Murti prediction.
But he noted a few other features about the GSCI:
--If the price of petroleum outstrips the gains in other commodities, the managers of companies supervising clients' GSCI investments must sell petroleum instruments, not buy, so as to keep the client invested in the GSCI's proper weightings. So blaming index investors for a rise in the price of oil can't be assumed unless the price rise is compared to those of the other commodities, primarily agricultural, in the GSCI. A soaring price of oil and a declining price of other commodities could lead GSCI managers to sell, not buy, petroleum contracts.
--By definition, the GSCI is long commodities. It is structured to buy into the market, and can't sell short. But Goldman Sachs' proprietary trading book can short the market. The two activities are separate.
--Many GSCI clients want commodities to be a certain percentage of their total portfolio, and not necessarily ride the bucking bronco all the way to the highs. With commodities this year soaring relative to other investment products, like equities, investment managers at Goldman often have found themselves as net sellers of commodities, in an effort to keep the commodity portion of customers' holdings in line with a targeted percentage for commodities in an individual's portfolio.
It's not certain if this group is going to be called upon again by the CFTC. But Casturo's comments were enough for Paul Cicio, who represented the Industrial Energy Consumers of America. He said after hearing Casturo speak and answer questions that he no longer was convinced that index activity was driving oil prices higher.
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