Thursday, June 4, 2009

Volume Explosion Seen In Goldman Sachs Commodity Index

And now for some midday Schrodinger wave function collapse:

"If a volume explosion hits the GSCI index, does it exist if nobody witnesses it?"

It is quite obvious that nobody at all was aware of any impact pieces out of Goldman that would herald summer of 2008 crude price targets... The chart below shows the insignificant volume pop in the GSCI.

A brief recap on GSCI from Seeking Alpha.
The GCSI is an index of 24 commodities weighted by world production. Goldman Sachs believes each commodity should be weighted in proportion to the amount of that commodity flowing through the economy.

Because commodities can be held in many different ways, it is impossible to directly measure the amount of capital dedicated to holding that asset. For a stock you can measure its market capitalization which represents the total amount of capital dedicated to holding that stock. But for commodities, you can't do that. The way to measure economic significance of commodity is to measure its production, which in turn is related to how much capital is dedicated to that commodity.

At this point, theoretical elegance clashes with investment prudence. The world's most widely produced and traded commodity is oil and related products. Reflecting that, the GSCI has a 73.5% weighting in energy commodities. Of the total index, 45% is weighted to Crude Oil. Of the remaining 27% of the index, 10% is allocated to each of agricultural commodities and industrial metals. The final 7% is split between precious metals and livestock. The GSCI is designed to reflect reality without concern for investability.

hat tip Frank Sphere: Related Content
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