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Comex settling gold contracts with cash instead of gold

Tuesday, December 1st, 2009 | Economics | Permalink | No Comments |

Jesse’s Cafe Americain - Gold, Comex and the Exchange for Physical:

Some months ago a chap described changes in the comex rules for futures contract deliveries. Therein it was described that the EFP, exchange for physical, rules were amended to allow for delivery of GLD shares in lieu of bullion.

Well take a look at something new, at least for me, in Monday’s comex preliminary volume and open interest report. On page 3 of the attachment, notice that in addition to futures contracts listed under the EFP category, a new category is listed: “Delivery Cash Settled” = 2866 december gold contracts. Just so happens 2866 was exactly the number of delivery notices issued on FND as reported in the Nov 27 vol and op int report.

Conclusion: guess you can no longer get bullion via using comex contracts. This apparently is the next step in the evolution of gold trading.

Previous signs of constricted gold supply:

Check that last link. It was in July - just five months ago - that Comex first failed to deliver physical gold to settle a gold futures contract. Instead, shares of the GLD ETF were used for settlement. Now Comex seems to be delivering little to no gold, using cash and ETFs instead. If a commodities trading market can’t deliver actual commodities then it’s just a gambling parlor with no connection to real world commodities that you can reach out and touch.

If this keeps up the value of physical metal - as opposed to paper promises of gold - could skyrocket. More on the difference between paper and physical markets here (second one happens to be a repeat of the above):

Tags: etfs, gold, paper vs physical

Gold hits another all time nominal high of $1,059 Oct. 7

Friday, October 9th, 2009 | Economics | Permalink | No Comments |

MoneyWeek - Gold hits an all-time high - yet no one’s interested:

I remain among my ‘cleverer’ friends (some of them owned Northern Rock) the eccentric who bought gold. I am still waiting for the day when they come to me asking for mining tips. Long may it be before they do so.

In any case, it’s important to enjoy the moment – we often forget to. But, come the morning after, as our wizened man from the 1970s will tell you, one would advise some caution. Gold has made a daily close at all-time highs, but we need to see a couple of weekly closes above this level to confirm things.

As I’ve often said, I still expect gold to go a lot higher in the longer term – at the moment I expect $1,400 by spring 2010. But it won’t get there in a straight line, and for now, the positions taken by the futures traders on the Comex suggest a top. If stock markets do turn down, they will take gold and gold stocks with them.

I originally said I’d buy gold after it went down a bit. Then I relented and bought my first gold ETFs in my 401K retirement account just below $800/ounce. I bought more in the $800s, then more in the $900s. I’ve picked up a bit more at the over-$1,000 price based on bullish trends. The upside potential seems much greater than the downside risk.

I’ve diversified my purchases into different ETFs - GLD, GTU, CEF, and lately all of it in SGOL (Swedish Gold ETF, which promises 1/10 ounce physical gold held in reserve for every share). GTU has performed the worst of the bunch, so I’ve reduced my holdings in it to almost nothing.

Note that gold investments are taxed at the higher collectible tax rate rather than the normal investment tax rate. I do almost all of my investing through my tax-protected 401K (more on that later), so it doesn’t matter to me, but it might matter to you. Consult a financial adviser or CPA for tax implications.

At this point silver may increase even more rapidly than gold. It has roughly doubled in less than a year. The CEF ETF includes some silver exposure. I also hold the SLV and SIVR ETFs. With ETFs diversification is good (see below).

Don’t forget energy stocks. There’s currency, there’s precious metals, and there’s oil and other energy equivalents. The last two are real. Everything else that’s based on paper and promises are potentially phony.

Speaking of which, for warnings on the SLV ETF see here. For very serious warnings on leveraged (AKA Ultra) and inverse ETFs see here. ETFs aren’t completely real - they’re based on markets and paper, too. For precious metals it’s always best to own the real stuff to eliminate counterparty risk. As always, my amateur investment advice is worth exactly what you paid for it. Caveat non-emptor.

Previously - Gold hit an all time nominal high ($1,008) on Sept. 30

Tags: etfs, gold

Not enough silver for the SLV ETF?

Tuesday, September 22nd, 2009 | Economics | Permalink | 1 Comment |

Ed Steer is skeptical:

The Comex Delivery Report showed that 6 gold and 23 silver contracts were delivered yesterday. I see that the GLD ETF showed a big jump yesterday… up a fairly substantial 490,487 ounces… 15.3 tonnes. The SLV ETF, which is owed around 30 million ounces, showed no changes once again. Nothing has been added to the SLV since September 3rd… while 763,000 ounces of gold have been added to the GLD. If you think something stinks here, you would be right about that.

Over at the Zürcher Kantonalbank in Switzerland, they reported their activity as of the end of the business week last Friday. They showed that their gold ETF took in another 23,952 ounces, while their silver ETF added another 198,212 ounces. I thank Carl Loeb for those numbers. Except for one week, ZKB has added silver to their ETF every single week for the last four months! And, if my record keeping is accurate, the silver ETF… SLV… has had only six changes in inventory level in the last three months; three up days and three down down. At the beginning of that three month period, the SLV ETF had 280.5 million ounces. As of yesterday it had 280.6 million ounces. Something does not compute here… probably to the tune of 30 million ounces!

Ted Butler had concerns about SLV last year.

Gene Arensberg isn’t worried, at least not for the same reasons:

Silver ETF critics usually have an agenda, such as a competing product or a naturally suspicious bent toward bullion banks. But the largest silver ETF has invited a heightened level of blog-whipping lately for one important reason. As we reported earlier in April, SLV has already exceeded the amount of silver foreseen in its custodian agreement with JP Morgan Chase, London, (the agreement called for up to 270,484.574.5 ounces, SLV already holds 280,553,742.3 ounces and has held slightly more in the recent past with the same custodian). The trust as yet has not announced a new custodian or sub-custodian agreement (or the amount of potential silver which might be available under it). So that fact alone leads to some speculation that available metal is scarce. However, as we also reported then, Barclays said that its custodian had agreed to continue share creation support for the time being, (pending the sale of iShares), which will allow SLV to operate normally.

I like ETFs for getting exposure to metals inside my 401K retirement fund, but things like this concern me. I have some SLV in my retirement account. It looks like I need to diversify into other silver funds. I split the gold holdings in my 401K between three funds - GLD, CEF, and GTU - and I wouldn’t mind diversifying that a bit. There’s a new Swiss gold ETF (SGOL) that holds 1/10 ounce of gold for each share issued.

Last week gold opened and closed above $1,000. Today gold closed above $1,015. Good times.

Tags: etfs, gold, silver

Wells Fargo halts sales of leveraged and inverse ETFs

Thursday, August 27th, 2009 | Economics | Permalink | 1 Comment |

The other week I mentioned the dangers of investing in inverse ETFs and leveraged ETFs. Now Wells Fargo Advisors is “no longer permitting its advisers to sell leveraged and inverse exchange-traded funds through advisory accounts.” Link.

According to Minyanville other investment firms are either cutting back on activity surrounding those investment vehicles or eliminating them entirely.

Tags: etfs, investing

More on leveraged and inverse ETFs, and natural gas

Thursday, August 20th, 2009 | Economics | Permalink | 2 Comments |

The other day I mentioned that inverse and leveraged ETFs (such as 2x ETFs) could be dangerous. I wanted to buy some natural gas stocks, which are crazy low right now. I looked at HOU and found this description:

Horizons BetaPro NYMEX Crude Oil Bull Plus ETF (the Fund) seeks daily investment results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that correspond to two times (200%) the inverse (opposite) of the daily performance of the New York Mercantile Exchange (NYMEX) light sweet crude oil futures contract for the next delivery month. The Fund is managed by BetaPro Management Inc. ProFund Advisors LLC is the portfolio manager of the Fund. ProFund Advisors LLC serves as the investment adviser and provides management services to Horizons BetaPro NYMEX Crude Oil Bull Plus ETF.

That bolded part means it’s a 2X inverse ETF, which is bad joojoo. Chart from 2008 to present here. Note the January 2, 2009 reverse split - they had to convert five shares to one to increase the stock price and avoid delisting.

Instead I bought UNG. Chart from 2008 to present here. It’s currently trading right at its 52 week lows. Equities are way overpriced right now, but some commodities are crazy low and poised for a takeoff.

Tags: etfs, investing

“Warning: Leveraged and Inverse ETFs Kill Portfolios”

Monday, August 17th, 2009 | Economics | Permalink | 3 Comments |

Morningstar - Warning: Leveraged and Inverse ETFs Kill Portfolios:

If you think ‘Morningstar is just too conservative,’ then please read any one of these articles from other sources here, here, and here. My intent is not to scare you away from pursuing an actionable investment idea. If you’re hell-bent on using leverage for any period of time longer than a day, you’d be better off using a margin account in almost any real-world scenario. This is not an opinion–it’s a highly likely statistical probability. And interestingly enough, each successive time you bet against the odds, probabilities tend to become mathematical facts. It is my fiduciary duty to inform you as to why these products do not work exactly like their names imply, and I urge everyone in the ETF industry to embark on a similar public awareness campaign.

And the problem is that while a real index tracks said index over any time period, the leveraged and inverse ETFs can only do so on a daily basis. Look what happens:

If you were to repeat 10 consecutive days of up 10% days followed by down 10% days, both of the leveraged funds would end up at $81.54, which is a sizable difference from the $95.10 the index would end at. Repeat this process for only six months, and your ‘investment’ in either of these leveraged funds would stand at only $2.54. Yes, that’s a 97.46% loss. Talk about tracking error.

Now I understand why people say that leveraged and inverse ETFs are intraday plays that shouldn’t be held overnight. Oh, well. This is one of those discoveries that makes me glad I don’t attempt short-term trades.

Tags: etfs, investing