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BANKS: A love-hate relationship with commodities

August 08, 2014 - 12:00 GMT Location: London

KEYWORDS: banking , commodities , metal markets , Goldman Sachs , JP Morgan

Banks have had a chequered involvement in commodities over the years, and have much to mull over as the race to expand in the market begins once again.

When grain merchants in sixth-century Lombardy began issuing loans to farmers in return for a share of future crop production, they were laying the foundations of the modern banking system. By also accepting readily marketable commodities such as gold as collateral for those loans, and later issuing money backed by that collateral, the Lombardy merchants were building a framework for the world’s first private and central banks, as Randall Guynn, a lawyer at Davis Polk who represents many of the world’s leading merchant banks and broker-dealers, told the US Senate Banking Committee last year. For as long as banks have existed, they have been active in physical commodities markets, Guynn told the committee. But just as Guynn was called before the Senate to justify their longstanding presence in those markets, some of the world’s largest investment banks were announcing plans to scale back their commodities businesses or close them down...

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