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By William J. King
Friday, September 22, 2006

http://www.mramseyking.com/thekingreport.html

In yesterday's Wall Street Journal, Section C, there 
is a very interesting item in the article headlined 
"Some Investors Lose Their Zest For Commodities." 
he article notes that over that past few months, 
commodity funds have been liquidating commodity 
holdings. But here's the stunner: "Consider the 
Goldman Sachs commodity index, one of the most 
popular vehicles for betting on raw materials. In 
July, Goldman Sachs tweaked the index's content by 
cutting its exposure to gasoline. Investors tracking 
the index had to adjust their portfolios accordingly
 -- which sent gasoline futures prices tumbling."

Prior to Goldman's revision of the Goldman Sachs 
Commodity Index in July, unleaded gas accounted for 
8.45% (dollar weighting) of the GSCI. 

http://chinese-school.netfirms.com/Abacus-commodity-index-Goldman-Sachs....

Now unleaded gas is only 2.30%. 

http://www2.goldmansachs.com/gsci/#economic 

This means that commodity funds had to sell 73% 
of their gasoline futures to conform to the 
reformulated GSCI.

But it wasn't only commodity funds that were forced 
to sell. Goldman's decision to lower the weighting 
of unleaded gasoline in its commodity index and NOT 
to roll any portion of the GSCI attributable to 
New York Harbor unleaded gasoline created problems 
for arbitrageurs and commercial traders as well.

Here is the Goldman press release: 

"On July 12, 2006 Goldman, Sachs & Co. announced 
that, for the roll occurring in September 2006 (the 
September Roll) in relation to the Goldman Sachs 
Commodity Index (GSCI) futures contract expiring 
in October 2006, it would roll the existing portion 
of the GSCI that is attributable to the Reformulated 
Gasoline Blendstock for Oxygen Blending (RB) futures 
contract on the New York Mercantile Exchange but 
would not roll any portion of the GSCI that is 
attributable to the New York Harbor Unleaded Gasoline 
contract (HU) contract into the RB contract." 

http://www2.goldmansachs.com/gsci/articles/gsci_060816194642.html 

Goldman's changes probably induced arbs, commercial 
hedgers, and other traders to sell September and 
October unleaded gasoline future contracts to 
avoid possible (settlement, delivery, etc.) problems.

September futures expired in August; October contracts 
expire September 29. So unleaded gasoline prices 
collapsed in August and September.

* * *

Some Investors Lose Their Zest for Commodities

Natural-Gas Debacle at Amaranth
May Signal Broad Price Declines;
'Most Were Just Speculators'

By Gregory Zuckerman and Henny Sender
The Wall Street Journal
Thursday, September 21, 2006

On the heels of natural-gas losses at Amaranth Advisors and other hedge
funds and a tumble in numerous commodities, some investors are selling such
holdings in a shift that could send prices lower if it turns into a rush for
the exits.

After long shying away from oil, natural gas, metals and other raw
materials, investors of all stripes -- hedge funds, pension plans,
endowments and individual investors -- have become enamored with commodity
investing. These investors, including short-term speculators, have become
key in various markets, sometimes driving prices more than industrial
customers who buy the materials to make things or sell services.

How these Johnny-come-lately investors react now "will have an effect on
users, commercial producers, as well as investors," says Howard Simons, a
strategist at Chicago-based Bianco Research. "The flood of money that's come
in is out of scale to anything in the past, and most were just speculators."

There are 68 commodity-oriented hedge funds, up from 29 just three years
ago, according to Hedge Fund Research Inc. Those figures don't include the
growing number of managed-futures funds and so-called multistrategy hedge
funds, like Amaranth, that also deal in commodities.

As for pension funds, "until 2003, there wasn't a whole heck of a lot of
interest in commodities," says Neil Rue, principal at Pension Consulting
Alliance Inc. in Los Angeles. "But commodities are becoming a major asset
class and investments in the area have multiplied since 2003. It wasn't 10%
or 5% a year, but much more than that." Mr. Rue cautioned pension-plan
clients to be wary of commodities.

Much as they did with tech-oriented investments shortly before they tanked
in 2000, individual investors also have rushed into commodities, via stocks
of commodity-related companies and mutual funds that specialize in such
investments. There are 48 mutual funds that invest in commodities and
related shares managing $56 billion, up from 34 funds with less than $10
billion three years ago, according to fund tracker Morningstar Inc. The
Commodity Real Return fund of Allianz AG's Pacific Investment Management Co.
has grown to more than $12.2 billion, from $8 billion about a year ago.

The 13th-largest holder of gold in the world isn't a central bank but an
exchange-traded fund, a type of security that trades like a stock and tracks
the price of an underlying investment class. StreetracksGold Trust, the
largest gold ETF, has assets of $7.5 billion, up from $2.7 billion a year
ago, mostly from new investments.

For evidence of these investors' influence, consider the Goldman Sachs
commodity index, one of the most popular vehicles for betting on raw
materials. In July, Goldman Sachs tweaked the index's content by cutting its
exposure to gasoline. Investors tracking the index had to adjust their
portfolios accordingly -- which sent gasoline futures prices tumbling.

Some investors entered these markets because they saw a long-term
undersupply of a range of commodities, including oil, as economic growth in
China and India increased demand. But others were less interested in such
fundamentals and shifted in simply because commodities prices had gone up in
recent years, hoping to catch the next wave. Low interest rates made it
possible for hedge funds to borrow at attractive rates and invest in almost
anything.

Lead illustrates the impact: It's basically industrial waste, the unloved
byproduct of processing copper and gold. But prices for lead -- mostly used
in batteries, primarily for vehicles -- have more than doubled in the past
five years, even though stockpiles are high.

Now there are signs that some of that "hot" money is exiting the market.

"Large speculators began to liquidate gold and silver," wrote Mary Ann
Bartels, a Merrill Lynch analyst, in a report this week. "But there are no
signs of panic that accompany a bottom."

The gold ETF has seen little new money in the past month. "The luster is off
this sector, people are suddenly realizing that gold-fund returns will not
be as good as they've been," says Jeff Tjornehoj, an analyst at mutual fund
tracker Lipper.

Merrill Lynch's research suggests that hedge funds that speculate in oil
have been doing some selling lately, but many actually added to their
natural-gas positions while keeping their heating-oil positions unchanged.
Oil futures dipped below $60 a barrel during yesterday's trading session and
closed at $60.46, down $1.20.

The Pimco commodity fund is seeing little new investments lately, in part
because it's down almost 7% this year, though it also hasn't seen much in
the way of withdrawals, says portfolio manager John Brynjolfsson, calling
fund flows "relatively steady and uneventful."

A fall in commodities prices might not be all bad news. Though a rush for
the exits could cause pain for commodities investors, an additional decline
in the cost of energy and industrial metals could give a shot in the arm to
the global economy. And money moved out of commodities could shift into the
stock market, sending shares higher.

The end of this month could be key. Many commodity-oriented hedge funds let
investors withdraw money monthly or quarterly, so if losses persist, there
may be big withdrawals. That could cause more carnage in the hedge-fund world.

Amaranth's woes were caused by bad bets that natural-gas prices would
rebound. Yesterday, natural-gas futures continued reacting to a large
selloff of positions by Amaranth. October natural-gas futures on the New
York Mercantile Exchange dropped 7.5 cents to settle at $4.93 per million
British thermal units. November gas futures settled 18 cents down at
$6.02/MMBtu, December futures dropped 22.1 cents to $7.66/MMBtu and January
fell 23.6 cents to $8.20/MMBtu.

* * *

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