20 September 2013

Amazing - Another ETF Tells Investors They Can’t Redeem

In this powerful exclusive, I want to tell my readers that I have heard stories about plenty of people who have actually tried to take significant amounts of the shares of SPY (the S+P 500 ETF) to the custodian and been told that they can’t have the 500 underlying stock shares.

IMPORTANT - Powerful entities do not want people to have access to the debunking that Goldchat provides. As a result I have had constant ignoring of, and interference with, this blog. Simply reload this blog repeatedly (don't listen to those that claim this will just increase my page hits, they are bankster shill).


For those overly sensitive types who got all uppity about Shortodile Golddee, the above is called a parody. For those who don't get the joke see here (Eric will be disappointed that he hasn't achieved total gold blog world domination).

What I find amazing is that neither Grant nor Eric are aware that the only people who can redeem GLD for gold are Authorised Participants (and they only get unallocated gold, to boot). For those who are interested, I explained the redemption mechanics in detail in this post.

My best guess is that this rumour is based on is some large investor going to HSBC and asking for metal. Now ETF custodians will reject that because they can't take the shares directly, it is the trustee who gets (or issues) shares and then tells the custodian to give or take gold - the prospectus says that only Authorised Participants can access the redeem or create shares process.

It is a bit confusing what the rumour is, because initially Grant talks about someone going to the custodian, but then later mentions Authorised Participants. The other possibility is that the large investor went to an Authorised Participant and asked them to take their shares and redeem for gold. Again, the prospectus does not give GLD holders this right. I suppose an Authorised Participant could do it if it wanted, but there is no obligation. If the Authorised Participant involved was not a bullion bank with its own vaults, but just a paper trader/arbitrageur, then I can see how they would not have the capability to get physical for a client, particularly as they only get unallocated when redeeming.

Either way I think the custodian or the Authorised Participant telling the investor to bugger off is where the rumour starts and as we know with Chinese whispers the details get lost and it become generalised.

What I think would be news is if the investor went to one of the large bullion banks and the bank would not do a swap (buy GLD, sell them Allocated). In the meantime, this is no more than gossip.

19 September 2013

Faux Gold Arbitrage

This is another post on backwardation, fourth in a row. Maybe I need to change this blog to www.backwardationchat.blogspot.com.

Anyway, I have been corresponding with Professor Tom Fischer of the University of Wuerzburg on backwardation and I've been remiss in not drawing my readers' attention to his Faux Gold Arbitrage article which was published by Bullion Vault on Sep 3rd or available from Tom's website as a pdf here.

Tom's article addresses the claim that backwardation is abnormal as it is profit that is not being arbitraged away and he picks up on the interest rate differential point I made in my 2008 "Gold isn't in backwardation, the USD is in contango" post.

An important point he makes is that arbitrage is "an investment that outperforms the risk-free rate of return in that currency ... “making money out of nothing”, or a “free lunch”, as we could borrow money if we do not have any, then outperform the loan's interest (the risk-free rate) by ways of the arbitrage strategy, and finally pay back the loan while keeping the profits over the risk-free return."

He goes on to note that if an investor had to first borrow gold to run the arbitrage, then at the end of the period the amount earned from selling gold at spot and buying the cheaper future would just equal the interest rate on the gold loan. Therefore no profit and thus no arbitrage.
Because gold is monetary (and not a commodity) and has an interest rate, OTC forwards and futures markets just reflect the interest rate differential between the two currencies USD and XAU. From this viewpoint, gold futures markets are just synthetic gold borrow/lend markets. Consider these simplified flows involved in a backwardation "trade" for someone with gold using Tom's numbers:

Start of trade:
  1. Sell gold: -1000oz
  2. Receive cash: +$1,500,00
  3. Buy future (ignoring margin for simplicity) @ $1,470
  4. Put cash on deposit @ 1%: -$1,500,000
End of trade:
  1. Recall deposit with interest: +$1,515,000
  2. Pay cash for future: -$1,470,000
  3. Receive gold from future: +1,000oz
Consider these flows for a gold loan:
Start of loan:
  1. Loan gold @ 3% based on $1,500 price: -1000oz

End of loan:
  1. Gold loan repaid: +1,000oz
  2. Receive interest on loan: $45,000
Compare the net flows between the two:
Date Backwardation Trade Gold Loan
Start -1,000oz -1,000oz
End +1,000oz +1,000oz
End +$45,000 +$45,000

Backwardation (or contango) in a futures markets for currencies like gold is not an arbitrage trade, it is just a lend (for a backwardation or decarry trade) or borrow (for a contango or carry trade). Futures market prices just tell us what market participants think is the appropriate interest rate to receive or pay for a gold loan.

That interest rate is interesting and tells us something about the views of market participants, especially with respect to US dollars. But there is nothing right or wrong/abnormal about the fact that gold interest rates may be higher than USD interest rates, just like there isn't anything normal or abnormal about the fact that AUD interest rates are currently higher than USD interest rates.
PS - in emails Tom makes the case that if anything, backwardation should be the normal state for gold. But that is for another post.