Aug 2, 2011
Earlier this week, I showed you how Wall Street’s fat cats hide their big trades in the option markets. In that article I described some strange yet serious bearish option activity I discovered in the Nasdaq-100 (NDX).
Like clockwork, the Nasdaq dropped 90 points or 3%.
When heavyweights like Goldman Sachs (GS:NYSE) and Morgan Stanley (MS:NYSE) start to invest in something, you can make some “smart money” riding their coattails.
These financial superpowers use their connections and power to get an edge on the average investor. But with a little research and some smart investing tactics, we can uncover their buy and sell list… and get in on their secrets.
Wait until you hear what they are stockpiling…
Goldman Sachs are trying to completely corner the market on all metals at the point of distribution, starting with the US.
Goldman Sachs’ New Market Venture
Once in a while, a big firm ventures away from Wall Street to get its hands dirty. When a profit is at stake, nothing is out of reach.
Morgan Stanley took a left turn off Wall Street in 2008 when it took over Chicago’s parking meters for the next 75 years. That deal paid the city $1.15 billion up front and has made Morgan Stanley some serious coin. (Many say that Chicago should have asked for closer to $4 billion.)
Little does most of Chicago know that those parking meters are now controlled by investment groups in the Middle East. Don’t expect Chicago to change their free parking hours easily.
Goldman Sachs’s newest venture is also off the beaten path.
Goldman Sachs is getting in the metals market… in a way no one expected.
Gaining Advantage in the Metals Market
When you think about Goldman Sachs, you might think of its exclusive money management services or its elite investment professionals.
You would not expect to hear the news this “white shoe” firm just bought large, run-down warehouses.
That’s right; warehouses. But these warehouses have something special about them… They are chock-full of industrial metals like aluminum, copper, lead, nickel, steel, tin, zinc and plastics.
It all started last year when Goldman Sachs bought warehouse and logistics company Metro International Trade Services. The key to this acquisition was twofold.
- The London Metal Exchange approved Metro’s warehouses as designated delivery points for different commodities that trade on the LME.That means Goldman gets the metals at today’s prices and sells futures contracts for a higher price. Since Goldman now owns the warehouses, the cost to store the metals is less than the price of the futures contracts.
In other words, it’s a guaranteed profit!
- It can also provide financing for customers who want to buy metals but need some time to pay for them. Goldman buys the material, stores it and charges fees, and interest to the client. It’s a win-win for Sachs.
What’s even more interesting is that Goldman Sachs only has to release a fraction of the metals it takes in. To an extent they can limit supply (delivery) if prices are not favorable or release more when prices are high.
More realistically, this means the rental income continues to roll in while the metal sits idle in the warehouse, even if there are buyers for all of it.
Another way to think about it would be if all the iPhones in the world were held in a warehouse by Apple. Apple gets to collect $5 a day in rent per phone to keep them in the warehouse. Even if there was a buyer for every phone, Apple slowly lets the out inventory to collect as much of that rent as possible.
How Can You Get In on the Action?
Copper and aluminum prices are off their lows and have been coming back along with demand. The key to profits for Goldman Sachs is something called “Contango.” Contango is when future prices get more expensive the further out in time you go. Most commodities like metals, grains and even oil tend to trade in contango.
This is because the costs to store, insure and transport commodities are reflected in the price. If you are buying copper futures for example, the longer you take before delivery, the higher costs you will have.
Even with higher prices for long-dated futures contracts, many manufacturers want to lock in today’s prices because they expect them to climb. Many metals, even aluminum, are being traded and stockpiled like currency and as hedges for inflation. Goldman is ready to take profits with the storage fees and with the serious price appreciation in metals.
Goldman’s investment gives me reassurance in the price strength and demand of metals. As a smart investor, we can use this cue to lead us to our next investment.
Whatever path you choose, remember that visionaries who think outside the box and aren’t afraid to get their hands a little “dirty” will often reap the greatest rewards.
Publisher’s Note: The news from Goldman meshes perfectly with a recent report from Taipan’s Kent Lucas. He has found a way to track the world’s silver supply that few folks outside of Wall Street know exist. If you have not read his special report, do it now.
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