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| Goldman Sachs Commodity Index |
The Goldman Sachs Commodity Index (GSCI) is a world-production-weighted commodity index, incorporating twenty-four commodity futures contracts that span five commodity sectors: energy, industrial metals, agriculture, livestock, and precious metals.
This index was launched in 1991 and was designed to be a benchmark for commodity investors comparable to the S&P 500 equity index. At the time the GSCI was launched, Walton (1991) put forth the case for investing in backwardated commodity futures contracts, adopting a Keynesian view on the commodity markets. Walton explained that
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In general, backwardation will be greatest in markets where commodity prices are very volatile, producers are very sensitive to commodity price fluctuations, and when it is costly to have large holdings of inventories (e.g., oil, ... [base metals, and livestock]). If any of these conditions fail to hold, the excess return will diminish.
For this reason, backwardation is usually greatest in markets in which commodities are consumed as they are produced and holdings of stocks are small because they are expensive to store or unsuitable for storage. These commodity markets are then more prone to supply disruptions, and as a result, there is frequently a premium in the spot market for physical possession.
It was with this theoretical backdrop that the GSCI was launched. At the time the GSCI was launched, it was largely weighted in commodities that had been historically backwardated.
According to Rohrbein, as of February 2007, the GSCI had “an estimated $60 billion in institutional investor funds tracking it, the majority of that coming through over-the-counter transactions.” On February 6, 2007, it was announced that Standard and Poor’s would be acquiring the GSCI, and that the index would be renamed, the S&P GSCI Commodity Index.
