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XMFSinchiruna (26.59)

Paper is paper is paper.



January 09, 2009 – Comments (12)

Based upon the steady increase in notices for physical delivery from the COMEX gold warehouse, anecdotal reports of futures contract redeemers being drilled repeatedly about why they are taking physical delivery, anamolies in gold futures like the backwardation condition noted weeks ago, the real disparity in value between paper gold assets and physical gold assets looks set to increase further... threatening the very structure of the bullion proxy systems. Through all the uncertainty, though, I believe CEF still offers a safer alternative to the ETFs, gold certificates, or any other form of paper gold / silver asset. 

In my opinion, the time has come to get out of gold futures contracts, the ETFs like GLD, IAU, SLV... and ESPECIALLY the leveraged bullion derivative vehicles like DGB, etc. If the COMEX does find itself constrained in physical supply, which is looking increasingly likely, then they'll either change the rules or default (the former being far more likely). A major rule change by the COMEX would further widen the moat between physical bullion and paper proxies, and spot prices would cease to be deteremined by the futures market altogether.

Merrill Lynch says rich turning to gold bars for safety Merrill Lynch has revealed that some of its richest clients are so alarmed by the state of the financial system and signs of political instability around the world that they are now insisting on the purchase of gold bars, shunning derivatives or "paper" proxies.

Gary Dugan, the chief investment officer for the US bank, said there has been a remarkable change in sentiment. "People are genuinely worried about what the world is going to look like in 2009. It is amazing how many clients want physical gold, not ETFs," he said, referring to exchange trade funds listed in London, New York, and other bourses.

"They are so worried they want a portable asset in their house. I never thought I would be getting calls from clients saying they want a box of krugerrands," he said.

Merrill predicted that gold would soon blast through its all time-high of $1,030 an ounce, and would hit $1,150 by June.

The metal should do well whatever happens. If deflation sets in and rocks the economic system it will serve as a safe-haven, but if massive monetary stimulus gains traction and sets off inflation once again it will also come into its own as a store of value. "It's win-win either way," said Mr Dugan.

He added that deflation may prove the greater risk in coming months. "It's very difficult to get the deflation psychology out of the human brain once prices start falling. People stop buying things because they think it will be cheaper if they wait."

Merrill expects global inflation to hover near zero, with rates of minus 1pc in the industrial economies. This means that yields on AAA sovereign bonds now at 3pc will offer a real return of 4pc a year, which is stellar in this grim climate. "Don't start selling your government bonds," Mr Dugan said, dismissing talk of a bond bubble as misguided.

He warned that the eurozone was likely to come under strain this year as slump deepens. "There is going to be friction as governments in the south start talking politically about coming out of the euro.
I don't see the tensions in Greece as a one-off. It is a sign of social strain in countries that have lost competitiveness."



12 Comments – Post Your Own

#1) On January 09, 2009 at 7:46 AM, saunafool (< 20) wrote:

Great post. I have one question regarding this:

"There is going to be friction as governments in the south start talking politically about coming out of the euro.
I don't see the tensions in Greece as a one-off. It is a sign of social strain in countries that have lost competitiveness."

Since when was Greece competitive?

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#2) On January 09, 2009 at 8:07 AM, JakilaTheHun (99.92) wrote:

Thanks for this.  I also found this article:

This is making me rethink my position on the gold ETFs.  

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#3) On January 09, 2009 at 8:25 AM, DaretothREdux (52.05) wrote:

Rec just for the title. But was good too.

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#4) On January 09, 2009 at 8:35 AM, binve (< 20) wrote:

Very good post, thanks!

Yeah, your suggested best holding (and mine too :) ), CEF, is the best call as always. But as an aside, GLD is in a very interesting position. They actually hold >700 tonnes of physical. So if there is a COMEX meltdown and it no longer has the "authority" (used very loosely) to determine the the futures price, physical funds will do well. I wonder if GLD has the resources to turn itself into another CEF type? This is all academic right now, because CEF continues to be the better call, but it is just interesting to think what might happen to GLD in the future.

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#5) On January 09, 2009 at 9:16 AM, JakilaTheHun (99.92) wrote:


Out of curiosity, do you believe that all the ETFs and ETNs are inherently risky, or just the gold and silver ones?  I can see reasons why the gold ones could be more problematic than the others, but I'm not sure if that's necessarily an indictment of commodity ETNs.  I realize that you always have to have some concerns about the underlying financial institutions running these things, of course, but I mean beyond that. 

I ask this as someone who holds a commodity ETN. 

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#6) On January 09, 2009 at 9:31 AM, XMFSinchiruna (26.59) wrote:


It depends on what you're in them for. If you're looking for a way to play price moves on commodities the way a futures trader might, moving in and out of positions frequently, then I suppose they're just fine. But people often invest in gold and silver as a hedge against larger risks like a systemic financial collapse or a more acute currency crisis... for those holding ETFs and ETNs hoping for protection from financial calamities ... that's where I think the time for these instruments has passed.

I won't speak to all commodity ETNs because I haven't looked at them closely enough to be able to qualify the risks specific to each one. In general, though, I do indeed have serious concerns for many of the financial institutions that have launched these instruments, and I would want to scrutinize the prospectus very very carefully to ensure that assets are not conjoined with the assets of the sponsoring or trustee corporation.

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#7) On January 09, 2009 at 11:30 AM, angusthermopylae (38.19) wrote:


I would ask how this mistrust of paper assets and desire for physical gold reflects on other commodities and assets.

Gold is considered valuable in the financial world because you "can" (ignoring all the intricacies of excange rates, export/import laws, and others) walk into a place and purchase something with it.  (Usually, you "purchase" the local currency and then buy what you want, but, at root, gold is the medium that's making the big moves)

Other items like this would be diamonds and silver...maybe platinum?  But silver doesn't have the concentration of value, and there have been recent articles on how easy it is to make diamonds...heck, you can even have your deceased beloved (or worst enemy) made into a diamond.

So, the question is, how are other value commodities going to work in this environment?  If physical gold is scarce or relatively overpriced, there should be a move by the rich and nervous toward these other assets.

...hmmm....which makes me wonder about the movements in more mundane things, like agricultural and industrial resources.  If everyone flees the dollar, will the guy who owns a 5 acre junk yard suddenly be the richest man in the neighborhood?

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#8) On January 09, 2009 at 1:01 PM, FleaBagger (27.59) wrote:

I think the leveraged gold ETN you were thinking of is DGP, not DGB.

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#9) On January 09, 2009 at 7:14 PM, XMFRosetint (40.58) wrote:

Nice post Sinchiruna. I own shares of SLW because I think it is particularly undervalued, but do you think I should move that money over to CEF? SLW has significant proved reserves, so I think it would be fine, but what do you think?

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#10) On January 09, 2009 at 10:52 PM, nuf2bdangrus (< 20) wrote:

If GLD is holding the real thing, and they claim to, then what is the counerparty risk?  The custodian?  Or are you suggesting the gold may not really be there?

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#11) On January 09, 2009 at 10:55 PM, nuf2bdangrus (< 20) wrote:


Link to previos post

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#12) On January 09, 2009 at 11:30 PM, kstarich (28.93) wrote:


I really like your posts regarding physical gold.  I purchased both gold and silver Dec. 4th.  Seems that was good timing on the price.  I have not done this before and was a little nervous driving home with all that metal in my car.  I even made a few u'ys just in case ( how rediculous huh!)  My real concern though is if the dollar does collapse and gold shoots way up isn't that a risk with possible government regulation of price as happened with FDR?  At what point is it a good idea to sell?

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