Brad Zigler

Gold Makes a Near Clean Sweep

There IS an arbitrage business in gold, precisely because of inefficiencies found in pricing the metal through different currencies. There's less "dirt" in deep, liquid markets like the USD/EUR cross, but anomalies can still be found/exploited by savvy desks.

If you trace the dollar-based price history of the euro and gold over the past year you'd see they're not very well correlated. The greenback may be a common denominator, but it's not the only influence.

The euro's appreciated 18.4 percent in the last 365 days; gold's risen 43.3 percent.

While the MEDIAN daily price change differential for gold and the euro is zero--indicating a lack of arbitrage opportunity--the MEAN differential tells a different tale.

Over the last year, the average daily difference in institutional asking prices (in dollar swaps for euro and gold) was five basis points (0.05%). That IS an arb. You just have to look for your arb opportunities over a short horizon.


On Dec 01 08:31 AM JeffDB wrote:

> Wouldn't the price of gold tend to move up or down in all currencies
> fairly consistently after adjusting for the movements of the currencies
> themselves relative to each other?
>
> If not, it would seem to provide quite a lucrative arbitrage situation
> for the traders.

Gold: A Bubble Brewing?

In actuality, the largest net short position in the gold market is held by commercials -- producers and users of the metals. Currently, their net short position is 70% above its three-year mean.

Swap-dealing banks' net short position is roughly HALF the size of the commercial accounts.

As the article points out, money managers are the pace setters in the gold market. Collectively, CTAs and other fund runners make up the largest single trading block in the gold futures market now. Their positions, in fact, are more highly concentrated than the commercials or the swap dealers.

About 70% of the exposure held by commercial gold traders is short; for swap dealers, shorts account for 83% of futures exposure.

Money managers tip much more heavily to the long side; fully 99% of their exposure is long.


On Oct 27 07:58 AM Donald Ingram wrote:

> The record short positions held by the relatively few players of
> the bullion banks is key, in their effort to cap the price of gold
> and keep the price from breaking out. They are having a difficult
> time of it because of the Chinese position of buying any dips.<br/>Think
> of size - the US has 9 cities with a population of 1 million or more,
> China has 160 cities of this size! With the average Chinese citizen
> encouraged by their government to buy and hold gold, this has essentially
> put a solid floor under gold at these current prices. The bullion
> banks will fail in their attempts to keep the price low. When this
> happens, and it will, just a matter of time, the price of gold will
> make it's major move higher.

Gold: A Bubble Brewing?

SW Richmond --

What should, in your opinion, be gleaned from the open interest figures?

There are historically "active" delivery months in the gold futures markets -- February, April, June, October and December -- in which volume and open interest concentrate.

To discourage weak hands, the clearinghouse gooses spot month (currently October) margin requirements significantly higher than those of back-month deliveries, which drives out speculators and leaves the front month mostly to commercials.

Serial expirations (such as November) are only added when regular cycle deliveries go off the board. Open interest and volume in these months, therefore, never has the opportunity to build to the extent of regular cycle deliveries

December is traditionally the most active delivery for gold, so an experienced gold futures wouldn't be surprised to see open interest and volume in that month comparatively high.

On Oct 27 08:04 AM SW Richmond wrote:

> December deliveries could prove problematic if there is no 'correction',
> so the likelihood of a correction is IMO high. Look at Dec '09 OI
> figures:
>
> www.nymex.com/gol_fut_...

Gold: A Bubble Brewing?

SW Richmond --

What should, in your opinion, be gleaned from the open interest figures?

There are historically "active" delivery months in the gold futures markets -- February, April, June, October and December -- in which volume and open interest concentrate.

To discourage weak hands, the clearinghouse gooses spot month (currently October) margin requirements significantly higher than those of back-month deliveries, which drives out speculators and leaves the front month mostly to commercials.

Serial expirations (such as November) are only added when regular cycle deliveries go off the board. Open interest and volume in these months, therefore, never has the opportunity to build to the extent of regular cycle deiveries.

December is traditionally the most active delivery for gold, so an experienced gold futures wouldn't be surprised to see open interest and volume in that month comparatively high.

On Oct 27 08:04 AM SW Richmond wrote:

> December deliveries could prove problematic if there is no 'correction',
> so the likelihood of a correction is IMO high. Look at Dec '09 OI
> figures:
>
> www.nymex.com/gol_fut_...

Gold or Oil: What's a Better Inflation Hedge?

Something to keep in mind: historically, the oil market's spent more time in backwardation than in contango.

The average three-month roll since 1985 is -17 cents a barrel. That means there's more likely a PROFIT, rather than a LOSS, awaiting a long-term oil investor.

The likelihood of a inverted market increases, in fact, in a bull market (when inflation's more likely).

Investors can use ETFs like USL, rather than USO, to minimize the contango affect.



On Aug 20 11:31 AM kohalakid wrote:

> chap08 makes a point that is overlooked in this article.
>
> For the average investor, the cost of rolling over a futures contract
> monthly, or paying the contango in advance by buying a further out
> futures contract, is a huge drag on any potential profit in oil.
>
>
> Currently the one year forward in oil is about 10% over spot while
> one year gold is about 1/2% over spot.

What to Do About 'What-If' Gold?

For some reason, SA only published HALF of the Hard Assets Investor article "What To Do With 'What-If' Gold."

Had you read the article's second half, you would have seen an illustration of the utility of GLD puts in protecting a gold hoard with a high cost basis. The full article can be viewed at www.hardassetsinvestor....

If you read the "Laying Odds On Inflation" article referenced in the piece, you'd see 60-40 odds laid for an UPWARD spike in the monetary inflation index. Since we can't know the future with perfect certainty, having a hedge strategy in mind in case of a downturn is just prudent policy.

On Jul 24 04:18 PM MikeTojo wrote:

> Why could possibly make this article an editor's choice?
>
> The only scenario I see this happening is if the 'Green Shoots' turn
> into a lush forest of towering red woods AND the world see no risk
> for decades to come, AND gold is no longer a store of value.

A Gold Putdown?

Banks attempting a "short corner" on gold? How can you be sure that banks' futures positions aren't hedges of long gold exposure in other markets, i.e, forward commitments or swaps?


On Jun 20 12:09 AM Market Sniper wrote:

> Maybe a lot more afoot here, Watson! Who sold the puts and who bought
> them? In as much as two banks have a short corner working in the
> gold market, would be willing to say that one or the other is involved
> in an options trade of this size. Both banks are custodians for gold
> ETFs. Hmmmm......

The Season for Gold? Not Yet

You've not read the article. NO assertion was made about SE Asian demand this spring.

The seasonal demand was postulated for AUTUMN.


On Jun 05 11:51 AM Screwloose wrote:

> Brad
>
> So it was SE Asian demand that fuelled this spring's highs - was
> it? The bullion jewellery buyers over there are very price sensitive,
> have volatile FX issues and are importing very little this year.
>
>
> Safe-haven investment is the sole driver of the market now.
>
> The historic seasonal demand trends are thus absent and invalid;
> insane money-printing and the concomitant currency risk makes this
> year a complete one-off.
>
> One failed Treasury auction and absolutely anything could happen.

The Season for Gold? Not Yet

To your question, "Nope". Gold's seasonality stretches back two decades, fueled also by fabrication demand for end-of-year holiday purchases.

While seasonal tendencies are not guarantors of price movements, neither can their automatic gainsay be relied upon as justification for undertaking an allocation risk. "Absent" and "invalid" are terms denoting absolutes.

There's no room for nuance?

The Season for Gold? Not Yet

Keep the name of this Web site in mind: It's "Seeking ALPHA," not "Seeking Beta."

How Much Gold DO You Need?

Enlightenment won't come to those who choose to remain in the dark.

Ad hominem attacks are weapons employed by those lacking the intellectual gifts to engage in reasoned discourse.

How Much Gold DO You Need?

To say that investors hold gold for only one purpose, "pure and simple," ignores investment reality. Gold is viewed through a lens of utility for fiduciaries who are obliged by the "prudent man" dictum to hold a diversity of assets.

The term "artifact," by the way, refers to a CHARACTERISTIC of gold, not gold itself.

On Jun 02 10:02 PM Donald Ingram wrote:

> In Rome at the height of the Empire you could purchase a tailor made
> toga, sandals and hand tooled belt for 1 ounce of gold.
> In New York City at the height of the Great Depression you could
> purchase a tailor made suit and new pair of shoes for 1 ounce of
> gold.
> Today, you can still purchase a new tailor made suit and pair of
> shoes for that same 1 ounce of gold.
> That is why people hold gold - it retains it's value over time. Plain
> and simple.
> By the way - it's not an artifact (atho can be) It's MONEY.

How Much Gold DO You Need?

I, in fact, examine SIX gold allocation levels in the analysis (see Chart 2), but advocate none. This is merely a dispassionate look at the past performance of gold as a portfolio component.

The gold component in the analysis is represented by the COMEX gold settlement price which is a real-time proxy for the cost of cash metal. I'm not using gold mining stocks or futures in the portfolio study.

The object of scientific research is to look at reality. People hold portfolios made up of real-world assets including, among other things, stocks, bonds, commodities and, perhaps, metal. For many people and institutions, investment simply isn't a binary operation: it isn't all-gold or nothing.

These investors deserve to know what effect is engendered by making space in their portfolios for one asset or another. This article deals, for the sake of brevity and focus, with ONE issue: the impact of varying commitments to gold over discrete time periods in the past one and a half decades.

I'd suggest that if you want to make a case for your debt argument, that YOU pen an article.


On Jun 03 03:46 AM KAIMU BIZ wrote:

> ALoHa !!
>
> Brad ... at the beginning of your article you site HAI Nusbaum saying,
> " [2%] ... it's not a big bet. But I don't think you need big bets
> to capture the effect."
>
> You never really site any % ... and sure it is up to the individual
> to work out their own "asset allocation".
>
> If you use companies like GG or NEM then you have to deal with the
> intricacies and human conditions of management and their affinity
> for DEBT. It does not matter if it is IBM or NEM or GS or DRYS or
> PG they all own DEBT like they own a tuxedo! Its embedded ... GOLD
> has no DEBT because it has no Balance Sheet ... GOLD has no CEO because
> it has no company ... In terms of "real risk" in a World of DEADWEIGHT
> LOSS, where is "real risk analysis"? Its not at the US TREASURY,
> or WALL STREET or GSCI or COMEX or GLD or your local branch of the
> US FED.
>
> What I try to point out is the DEBT issues inherent in the US Dollar
> and in the American psyche. It is easily embedded because we are
> the World Reserve Currency, but you cannot divorce the SPENDING that
> is rampant which translates to rampant DEBT and this is all any global
> currency has as its "basis" ... DEBT. And so it becomes a choice
> not as to which currency is "safe" but which currency is "more" safe
> than the multitude of other DEBT based currencies that "float" the
> global GDPs. What "real money" is not DEBT based?
>
> Write an article on the monetary aspect of portfolios instead of
> allocations. The COMEX is not money and neither is the GSCI or GG
> or IBM or GLD. THey are all paper trades with unlimited liabilities
> and counterparties. Good for short term "trading" of DEBT based paper(a
> USD). Don't you have to sell positions to make a profit? When you
> sell what sort of debt paper are you handed for your efforts?
>
> The WORLD IS DEBT!

How Much Gold DO You Need?

I'm NOT advocating any portfolio, actually. I'm merely illustrating gold's utility as various contribution levels.

You'll not, too, that I'm not advocating a 2% weighting in metal. I've examined contribution levels between 0% and 20%.

I leave it up to individuals to decide what's appropriate for their particular circumstances.


On Jun 02 08:33 PM KAIMU BIZ wrote:

> ALOHA !!
>
> Brad, we appreciate your input here and it is clear you would recommend
> that portfolio's mainly stay weighted in equities, be it IBM or indexes.
> The way I read your article from a purely monetary view is this portfolio
> you use is 98% RISK based and 2% RISK hedged. Have you ever heard
> the term DEADWEIGHT LOSS? This is essentially what the current markets
> based in "monopoly pricing " result in over long term trends. The
> distortion of financial and monetary data to preserve the political
> and banking agendas have destroyed any true risk depth perception.
> In reality what would your portfolio look like had all the major
> US Banks been allowed to fail along with AIG and GM and a multitude
> of others on the cliffs precipice today and tomorrow. The markets
> have been distorted by the BUBBLE ECONOMY of the past thirty years.
>
>
> What everyone here leaves out of this discussion is the one word
> that the entire US EMPIRE is based on and that is "CONFIDENCE". Right
> now our money is backed by our ability to service our debts and that
> can be translated into the terminology most often heard "faith and
> credit". Faith that the USA can accumulate enough credit to to pay
> our DEBT until the next National Debt Ceiling must be raised in 2010.
> Accounting tricks aside "it is what it is"!
>
> On June 1, 2009, the US TREASURY reported that they had SPENT a total
> of $8.04TRIL USD so far during FY 2009(eight months). That is a SPEND
> RATE of 5.88, or for every $1 in receipts(tax revenues) our government
> spends $5.88 in outlays(expenditures). To put that into perspective
> the current National Debt(I am not even including the External Debt
> of $13.6TRIL USD)Limit is $12.4TRIL USD. As of Jan 1st our government
> spent 55% of that National Debt in eight months. How long did it
> take to accumulate a National Debt Limit of $12.4TRIL USD? Well the
> last year the USA had ZERO DEBT was in 1835, under President Andrew
> Jackson, so that's 174 years of DEBT accumulation. If you take 174
> times 55% you get 95.7 years. So it took Obama eight months to spend
> what the USA took 95.7 years to accumulate in DEBT. He is spending
> 2.87 times more than FDR did at the height of WW2(1945), D-DAY and
> all.
>
> Then an often missing part of every portfolio is DEBT. I consider
> paying off DEBT a much more important part of my investment plan
> than I do owning stocks or gold. How many people in America have
> been forced to sell their 401ks and IRAs at the bottom of the market
> due to DEBT ATTRITION? Recall that already oft quoted word to describe
> this phenom "REDEMPTIONS". Ask any of the LEH shareholders if they
> paid off their house before they bought LEH stock. Those that did
> not will be WalMart Greeters and I suspect there will be a lot of
> fierce competition for that job in every city in America. Where is
> DEBT in your portfolio? Where is MONETARY RISK? You call it USD hedge.
> The USD is extremely risky as money. Gold is not. Gold has always
> had value over a 5,000 year history. Gold never gets BAILOUTS ...
> Never files BK ... Never has a AIG(counterparty). As we have seen
> with the SubPrime fiasco, AAA is meaningless. This all boils down
> to CONFIDENCE. Why? Because without CONFIDENCE there can be no TRUST
> and once there is no TRUST your money is Zimbabwe.
>
> US PAYROLL TAX REVENUES have fallen off a cliff within the past two
> quarters.. The last time this happened was 2002 when the USDX was
> at 120. Over the next few years after that the USDX fell to 72. The
> current US PAYROLL TAX REVENUE crisis started in Q4 2008 and has
> accelerated into Q1 2009 when the USDX was maxxed at 92(intraday).
> If what happened in 2002 happens again then we can see the USDX at
> 44(92 minus 48). A four handle!
>
> A blast from the past, the Clinton era ... ITS THE DEBT STUPID! Its
> the DEBT in every way you know it ... US government, State, County,
> City, School, Business and Personal. Its all about DEBT devaluation
> and attrition. Our leaders are just buying time and their using our
> money to but it!
>
> Honestly pay off your DEBT first. I own my house. At least accomplish
> that in your lifetime.
>
> Then after that 2% is very low!
>
> GOVERNMENT IS ONLY AS HONEST AS ITS MONEY ...

How Much Gold DO You Need?

As indicated in the article, the maximum term (14+ years) used in the study was predicated by the tenure of the S&P/GSCI, the proxy for commodities.

You can tell by comparing the returns and reward-to-risk ratios of the 14-year period to the shorter intervals that gold's contribution to a portfolio would have been negative in earlier years.

Most assuredly, one should not expect the past decade's gold trend to be replicated in the future. Neither should one expect gold's preceding 20-year bear market to be relived.

It's for that very uncertainty that endowments maintain long-term baseline exposures to a panoply of asset classes.


On Jun 02 07:32 PM bcncv wrote:

> Thank you for the numerical analysis on gold. Too often, I will see
> articles and comments talking about the good &amp; bad of gold without
> any thought to what percentage makes sense. It is refreshing to see
> a real, rationale analysis of gold's place in a portfolio.
>
> My only criticism is that this analysis is based on the actual returns
> of the last few years, which are clearly not sustainable over a long
> period of time. I would be very curious to see how this analysis
> worked if you used an average growth rate of gold over the last X
> years. That would give a much better perspective on the long term
> viability in a portfolio.