Aluminum explanation: Contango trade leads to hoarding side effect.

The Aluminum Thing Explained

A blog about business and economics.
July 22 2013 10:00 AM

Aluminum Hoarding Is a Side Effect. The Real Profits Are in Trading.

I was glad to read on email yesterday that I was not the only one confused by the New York Times' expose on Goldman Sachs' Detroit-area aluminum hoarding. If you want to understand what's going on, you have to read Izabella Kaminska's piece for Alphaville.

I'm not sure I can effectively summarize the details of her account, but the basic story starts with the fact that the financial crisis put commodities prices in a state of extreme "contango" and "[d]uring a contango there is an exploitable arbitrage for anyone who can buy the underlying commodity, warehouse it and simulatenously forward sell it at a premium and then sit back and collect yield until it had to be delivered (at which point the trade could either be rolled on or liquidated)." The shortages and aluminum shuffling that the Times reported on are not the source of bank profits in this scheme, they're "just a very welcome side effect of the dark inventory game."

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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