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The S&P GSCI (formerly the Goldman Sachs Commodity Index) serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time. It is a tradable index that is readily available to market participants of the Chicago Mercantile Exchange. The index was originally developed by Goldman Sachs. In 2007, ownership transferred to Standard & Poor's, who currently own and publish it. Futures of the S&P GSCI use a multiple of 250. The index contains a much higher exposure to energy than other commodity price indices such as the Dow Jones-UBS Commodity Index.
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Index composition
The S&P GSCI contains as many commodities as possible, with rules excluding certain commodities to maintain liquidity and investability in the underlying futures markets. The index currently comprises 24 commodities from all commodity sectors - energy products, industrial metals, agricultural products, livestock products and precious metals. The wide range of constituent commodities provides the S&P GSCI with a high level of diversification, across subsectors and within each subsector. This diversity mutes the impact of highly idiosyncratic events, which have large implications for the individual commodity markets, but are minimised when aggregated to the level of the S&P GSCI.
The diversity of the S&P GSCI's constituent commodities, along with their economic weighting allows the index to respond in a stable way to world economic growth, even as the composition of global growth changes across time. When industrialised economies dominate world growth, the metals sector of the GSCI generally responds more than the agricultural components. Conversely, when emerging markets dominate world growth, petroleum-based commodities and agricultural commodities tend to be more responsive.[1]
Economic weighting
The S&P GSCI is a world-production weighted index that is based on the average quantity of production of each commodity in the index, over the last five years of available data. This allows the S&P GSCI to be a measure of investment performance as well as serve as an economic indicator.
Production weighting is a quintessential attribute for the index to be a measure of investment performance. This is achieved by assigning a weight to each asset based on the amount of capital dedicated to holding that asset just as market capitalisation is used to assign weights to components of equity indices. Since the appropriate weight assigned to each commodity is in proportion to the amount of that commodity flowing through the economy, the index is also an economic indicator.[2]
Controversy
Goldman Sachs' entry into the commodities market via the Goldman Sachs Commodity Index has been implicated by some in the 2007–2008 world food price crisis. In a 2010 article in Harper's magazine, Frederick Kaufman accused Goldman Sachs of profiting while many people went hungry or even starved. He argued that Goldman's large purchases of long-options on wheat futures created a demand shock in the wheat market, which disturbed the normal relationship between Supply and Demand and price levels. He argues that the result was a 'contango' wheat market on the Chicago Mercantile Exchange, which caused prices of wheat to rise much higher than normal, defeating the purpose of the exchanges (price stabilization) in the first place.
However, in a Jun 2010 article in The Economist, the argument is made that Index-tracking funds (of which Goldman Sachs Commodity Index was one) did not cause the bubble. It describes a report by the Organisation for Economic Co-operation and Development that used data from the Commodity Futures Trading Commission to make the case. For example, the report points out that even commodities without futures markets also saw price rises during the period. However, counter-arguments have been made that the commodities without futures markets saw their prices rise as a consequence of the rising prices of commodities with futures markets: the World Development Movement, a social justice lobbying organization, states there is strong evidence that the rising price of wheat caused the price of rice to subsequently rise.
Leah McGrath Goodman, a reporter with experience covering commodities markets, described an experience writing about the Goldman Sachs Commodities Index in her book "The Asylum". Around 2007, she wrote an article for the Futures Industry Association trade magazine about the indexes. She concluded the massive amount of money in the indexes following the oil futures market dwarfed the actual oil futures market, by around 5 to 1. She alluded to the theories of Milton Friedman, who believed that inflation was caused by "too many dollars chasing after too few goods". She concluded that the indexes were apparently thus causing oil prices to rise. Her article was dropped after a man from the FIA magazine showed it "to people around Washington" and told her it would be "politically explosive".