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Commodities were up but somehow Goldman's index for them was down

Section: Daily Dispatches

Goldman Sachs Sells Top Commodity Index

By Kevin Morrison
Financial Times, London
via Yahoo News
Tuesday, February 6, 2007

Goldman Sachs has agreed to sell its GSCI commodity index to Standard & Poor's for an undisclosed amount.

The move will give S&P a potentially powerful influence on commodity markets as any changes to the index composition can have wide ramifications for underlying commodity prices.

The GSCI, the world's leading commodity index, has about $60 billion tracking it. Most of these funds are managed by Goldman, which is the largest commodities trader among investment banks. The management of these funds will not change as a result of the transaction. Funds trading the index have become the most popular route for investors wanting exposure to commodities.

However, the GSCI underperformed last year, falling about 15 percent, even though most of the 24 commodities in the index recorded a price increase. The fall was mainly attributable to the higher forward prices for crude oil futures versus the spot price. This meant investors rolling forward their exposure to oil futures had to pay more than the price they received for selling the spot contract before expiry. This is known as the negative roll yield.

The GSCI, which was launched in 1991, under-performed against other commodity indices including those provided by Dow Jones-AIG and Deutsche Bank.

"The sale of the GSCI is a strategic decision to reduce our management of indices. It has nothing to do with the underperformance last year of the GSCI," said Goldman Sachs.

Last year, Goldman Sachs attracted criticism for the reconfiguration of the GSCI when it dropped the Nymex unleaded gasoline futures contract and did not replace it immediately with another gasoline contract.

The change was a big factor behind the steep fall in the price of unleaded gasoline, which accounted for more than 5 per cent of the GSCI before its exclusion.

David Guarino, a spokesperson for S&P, said it had no plans to change the configuration of the index, which has been criticised for being too weighted towards the energy sector.

Goldman will also sell its sector indices for healthcare, financial services, utilities, consumer companies and cyclical industries and the Goldman Sachs Technology Index. Goldman will license the GSCI from S&P so it can continue to provide investment products to clients based on the index. Licensing of the GSCI is the only revenue stream for the index.

S&P, best known as a credit-rating agency, said that once the acquisition was completed, it would not continue its two existing commodity indices.

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