Elements MLCX Gold ETN Currently at 1,000% Premium: Sell Now

Anyone who owns Elements MLCX Gold ETN (GOE) needs to be aware that the price is likely to drop more than 90% very suddenly.

The one thing that separates ETFs (and ETNs) from closed-end funds is the ability to keep price and “indicative value” closely aligned through a creation/redemption process. ETFs have “authorized participants” with the ability to exchange shares of the underlying asset for shares of the ETF (when the ETF is trading at a premium) and vice-versa. This arbitrage mechanism is lacking for closed-end funds, so they are always trading at a premium or discount.

I recently pointed out that MacroShares trade at premiums and discounts, but they at least have a logical explanation. However, Elements MLCX Gold ETN (GOE) is trading at a 1,000% premium for no apparent reason.

Checking their website for news doesn’t help, as the latest press release is dated October, 2008. The FAQ explains that a daily NAV is not calculated, so the “indicative value” will be used for the purposes of determining repurchase price.

The note issuer for GOE is Credit Suisse (CS), and the distributor is Nuveen. The prospectus indicates that the offering is for $250 million (250,000 shares at an initial price of $10). It appears that there are only 50,000 shares outstanding, so issuing more shares should not be a problem.

Keeping the price aligned would seem to be a simple task of:

• issuing more shares
• sell them on the open market
• collect an outrageous premium
• repeat as necessary

Eventually the premium shrinks to the point of making it no longer worth the effort. That is how ETF/ETN price arbitrage is supposed to work. The price versus indicative value discrepancy started to creep in during the first week of February and has been accelerating ever since.

So why aren’t Credit Suisse and Nuveen issuing more shares to take advantage of this huge premium? An Elements representative states there are two problems causing this: 1) the market maker has run out of inventory, and 2) the issuer (Credit Suisse) has decided not to issue any more shares.

In other words, Credit Suisse is about to shut down this fund. They have stopped issuing new shares, but they haven’t announced the fund’s closure yet. The irrational volume in February allowed GOE to escape the latest issue of ETF Deathwatch.

When the fund closes, remaining shareholders will be liquidated at the indicative value. Additionally, Credit Suisse could decide to start issuing shares again. Either way, the price of GOE will eventually return to its indicative value. Meanwhile, another 20,500 shares exchanged hands today, pushing the price to $114.90 while the indicative value is $10.05. Someone is about to get hurt.

Disclosure: No position.

Comments

[Highgamma:]

Someone IS getting hurt. I assume whoever is short is getting margin calls.

Isn't this the clearest case of market manipulation ever? doesn't the SEC have a role in dealing with such blatant market manipulation?

Mar 10 07:16 AM

[tradetime:]

Thanks for that, I don't own them but it alerts me to keep a closer eye on these things.

Mar 10 08:31 AM

[donzelion:]

Thanks - I have terrible trouble figuring out the workings of ETNs in general. How are they taxed? (ETF's are nicely tax efficient, ETNs were supposed to be even more tax efficient, but IRS says otherwise...) How are they guaranteed? (I suppose rock solid guarantees from reliable firms like Bear Sterns or Lehman Brothers ought to suffice...after all, its a 1 in 100,000,000 likelihood that such firms will fold...)

I'll steer clear on ETNs for now, until people a whole lot smarter than I am figure out all the fine print. (I said the same thing about CDOs once upon a time...)

Mar 10 10:13 AM

[Ron Rowland:]

Credit Suisse press release:
www.bloomberg.com/apps...

Mar 10 10:31 AM

[PROXIMO:]

There appears to be an error in the math. The offering of $250 million is not arrived at by 250,000 x $10.

Mar 10 01:32 PM

[Ron Rowland:]

Good catch PROXIMO. The $250 million is correct (which would translate to 2.5 million shares at $10).

Mar 10 02:43 PM

[Ron Rowland:]

oops - make that 25 million shares (I'll get it right one of these times).

Mar 10 02:44 PM

[Troubled As...:]

Ron, I blame this single day 40% drop on you. Great call!

Mar 10 02:49 PM

[Everyday Fi...:]

This is extremely bizarre. I had posted on this 3 weeks ago when the ETN was up 421% vs. a few % up for gold during the same time period. Following my post and little notice even though the article was picked up by a few networks and message boards, it took several weeks before the SEC and Credit Suisse actually took some action on this. Today is the start of the downward decline it seems.

Here was the article from last month with the background and comments at the time:

www.darwinsfinance.com.../

Mar 10 03:35 PM

[James Davis:]

I have been watching this since Feb 18th.

The way Credit Suisse has handled this is a disgrace. More evidence that none of these Wall St Clowns has anyones interest but their own in mind.


Borrows are probably impossible to come by (for retail) on this, but anyone who was squeezed and forced to cover at this obscene price should sue the morons for market manipulation.

PS Who is long this rat and NOT selling? No one? Or the manipulators.

Mar 10 07:31 PM

[James Davis:]

I'll tell you what I really don't like about this.

If the SEC can't crack down on something as obvious as this promptly, how can they catch and repair more subtle offenses?

Don't tell me it's about funding. That's crap. It's about a little street sense and the will to deal with market perversions.

Mar 10 07:37 PM

[James Davis:]

Explain how this can trade 25k a day on 50k float?

Mar 12 01:51 PM