New COMEX Rule: Another Reason to Fear ETFs

 

www.silver-coin-investor.com

Regardless of their expensive annual fees, frequent tracking errors, and the simple fact that you’ll never be able to actually touch the gold or silver your ETF claims to hold, there are several more reasons ETFs should never be used by precious metals investors. An important rule change by COMEX, the American commodity exchange, allows ETF substitutes for precious metal delivery.

Paper as Metal

To address a temporary problem of liquidity, COMEX has systematically created an even bigger problem for investors. The exchange allows investors to make good on their futures positions with gold and silver ETFs rather than the real assets, thus opening up the door for hugely distorted market prices.

How it Works

Under the clause 104.36 in the COMEX rulebook, exchanges can take place on the exchange as long as the products meet certain criteria. After sorting through legalese, investors find that the criteria isn’t as demanding as one would expect from a multi-trillion dollar exchange, but is actually quite loose. COMEX requires that exchanges be made in economically equal products.  For instance, a 1000 ounce silver futures position can be used in the delivery of 1000 ounces of silver, despite their inherent differences.

This creates immense problems for investors, as well as the exchange itself. First, no silver actually trades hands, but only a silver derivative that has supposed claims to silver.  Second, the exchange-traded fund is economically similar in that it has equal worth to the same amount of silver; however, investors cannot receive physical delivery from the ETF issuer. In essence, purely derivative investments are equal to physical metals in the eyes of COMEX, even though the reality is quite different.

Further Complications

Reading from the prospectus of the two biggest gold and silver exchange-traded funds reveals that through the COMEX marketplace, paper can really be turned into gold!  The popular SLV ETF discloses in its prospectus that there are times when the exchange-traded fund will hold cash, or cash equivalents, allowing itself the opportunity to issue more shares than the silver it actually holds in the trust.

In addition, the exchange-traded fund has the ability to make claims against third parties (a derivative) to track the price of silver on the marketplace. This opens the door for large manipulation in the silver markets, as investment dollars in the ETF can be placed on derivative bets. Then the shares can be exchanged through COMEX to meet delivery on futures positions. 

The result is that derivative products owned by SLV can easily find their way into what is supposed to be a purely physical market, allowing for the opportunity of an oversupply of silver compared to what is actually in existence in vaults.

What it Means for Investors

ETF investors are clearly at a disadvantage, although the chance of manipulation is only a bullish signal for physical investors. COMEX rules have allowed artificial inflation of the amount of silver futures available prices, and it is sure that physical metals will only gain in value as this comes to light. There is simply no better investment than physical metals both for the short and long term.

Dr. Jeff Lewis

By David Lew
Two months after gold posted the historic high price of $1,227 per ounce, bullion investors have been caught in pains of losing money for every ounce of the yellow metal. On Thursday, gold plunged to its biggest one-day loss in 16 months. The yellow metal fell 4.4% in volatile trade, plunging below $1,060 an ounce.

Is all the bubble talk on gold turning true? Is gold price headed down to $1,000 or below that level in February? That is the question bullion investors and gold analysts are asking these days.

The biggest irony and risk in investing in gold these days is the disastrous predictions that bullion analysts with investment banks have been making all these months. While some analysts have predicted that gold price would skyrocket to an astronomical high of $3,000 to $ 5,000 per ounce in few years, several banks have been consistently predicting a great bull run for gold all these days.

I have been wondering whether the hype on gold price is created by bullion analysts with global banks.

Read now some interesting comments that several investment banks have made on gold recently:

According to Ernst and Young, which employs 144,000 people around the world, gold price will continue to rise in the long-term, reaching as much as $2,500 per ounce within the next two years.

”The underlying factors driving up gold prices remain in play and will continue to do so for some time, meaning that the precious metal will remain an attractive proposition. Gold prices will remain high. The world is not out of trouble and inflationary pressures cannot be ignored,” the investment bank said.

Recently, leading British bank Standard Chartered predicted in its latest Commodities Quarterly report that gold prices will continue to advance, with a particularly strong showing in 2010.

“The increased availability of scrap gold as prices surge to new highs will see gold average $1,300/oz in Q4 2010 – once the dollar resumes its weakening trend,” said Standard Chartered Bank.

It said that anyone with gold investment in their folds is well-positioned for a great future.

Similarly, Commerzbank said recently: “A further gold price increase has to be expected, especially as short-term-oriented market participants are likely to be jumping on the bandwagon.”

Likewise, Africa’s Standard Bank said that households in China have become the world’s No.1 buyers in 2009. “There is still very good physical demand for Gold ahead of [early Feb's] Chinese New Year.”

While several banks have been predicting a boom time for gold, there is one global bank that has been consistently sharp on gold price—HSBC.

Some months back, HSBC announced its gold price forecasts for 2009, 2010 and 2011. The world’s largest financial services group predicted that the yellow metal would average $990 per ounce in 2009.

HSBC also revised its estimate for 2010 from $950 per ounce to $1,100 per ounce, while it now pegs gold at an average of $975 per ounce in 2011.

Globally, banks have been the aggressive traders in gold. Banks view gold as safe assets. Banks lend money to people, if they are ready to pledge their gold for loans. Central Banks are trying to build up gold reserves so that nations’ foreign exchange reserves are stable and secure for the future.

But the only trouble is that when banks begin to predict gold prices, things go haywire in bullion market. Banks predict gold prices according to their whims and fancies. So, it would not be too much to say that banks are, in fact, trying to create the bubble phenomenon in gold, by forecasting gold prices without throwing light on basic fundamentals.

Can the bullion analysts and banks stop predicting gold price? Can the physical gold price go up or down according to the precious metal’s inherent asset and holding value?

SPDR GOLD TRUST SALES

Gold bubble worries lead to significant sell-off in top gold ETF

Investors have been taking profits in their holdings in the world’s largest gold ETF on ‘burst bubble’ worries

Author: Lawrence Williams

Posted: Wednesday , 09 Dec 2009

LONDON -

The world’s largest gold-backed exchange-traded fund, SPDR Gold Trust (GLD), noted that its holdings fell to 1,116.247 tonnes, worth over $41 billion at the current gold price, as of December 8th. This represented a fall of 1.2 percent or more than 13 tonnes in a day and was the largest one-day drop in around five months according to a Reuters report. The SPDR Gold Trust ETF hit a record high of 1,134.03 tonnes on June 1, and up until recently had been climbing back towards this level again.

Further falls were expected to be announced today as the gold market is going through a period of uncertainty and some investors are liquidating some or all of their holdings, and taking some hefty profits, in case the recent gold price falls are because a gold price ‘bubble’ has burst.

The SPDR Gold Trust gold holdings are larger than those of most nations’ Central Banks, and there has always been a worry that this overhang of gold, effectively in fickle investors’ hands, could in itself prompt a catastrophic fall in the gold price if sentiment moved sufficiently to generate a major sell-off, leading to a downwards price spiral.

So far this has not happened, and with the weaker dollar this morning seeing the gold price pick up, and continuing economic uncertainty, there is evidence of buyers coming back into the gold market seeing the earlier falls as a good buying opportunity, and ignoring the ‘bubble’ talk.

There is no doubt that the recent sharp movements in the gold price that have seen it fluctuate up and back down by nearly $100 in the past weeks make this a market for those with nerves of steel. Several observers have warned of excessive volatility ahead and these warnings are definitely coming into play. The fundamentals which have been driving the gold price upwards are still in play, but as we have warned before on Mineweb, markets are often driven by investor sentiment and if the force is no longer seen to be with gold there could be even more volatility ahead for the price until some stability sets in.

Movements up or down in the SPDR gold ETF holdings will thus be watched with particular interest over the next few days as this will be a good indicator of where gold investment sentiment is trending.