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Guest Post: Commodity ETFs - Diversification Or Beta Generators

Submitted by Tyler Durden on 09/04/2010 13:32 -0400

Guest Post

Submitted by JM

More on Center Bets: Commodity ETFs as Diversification

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Sat, 09/04/2010 - 13:44 | 563757 TooBearish

ETFs are varied and mostly flawed by design - garbage in, garbage out - "...I didn't look at futures because a lot of people don't use them..." Huh?!?

Sat, 09/04/2010 - 15:21 | 563843 jm

I don't disagree about ETF design. Just saying a lot of people use them. You aren't getting much bang for the buck for a lot what is advertised.

Sat, 09/04/2010 - 15:59 | 563879 TooBearish

I have absolutely no hard evidence but would hazard a guess that 90% of the ETF volume you cite is HFT algos banging the shite outta each other. Many commodity ETFs display horrid liquidity gaps. Disclosure -They suck but I am biased anyway as I am a CTA.

Sat, 09/04/2010 - 16:14 | 563892 jm

CTA props. There's liquidity gaps there 4 sure, but what started my thinking about this was possible arbs between DBO and USL (example).

One other thought: HFT is nothing compared to the OTC volume that totally dominates commodities now. Imagine if even a fraction more contracts took delivery of cocoa their futures... oh, wait.

Sat, 09/04/2010 - 19:56 | 564079 TooBearish

Hehehe LAO

Sat, 09/04/2010 - 13:53 | 563764 strannick

The metrics cited for GLD via Barrick would be noteworthy and merit close analysis, except for the fact that GLD is a corrupt manipulated bogus farce

Sat, 09/04/2010 - 14:20 | 563796 Spitzer

Yep, even the managing director owns phisical but no GLD shares

toward the end of the clip- http://www.youtube.com/watch?v=SikYbAtXWyg

Sat, 09/04/2010 - 16:32 | 563916 DavidPierre

GLD Managing Director Jason Toussaint Does Not Own ANY GLD Shares...

BUT he owns physical gold and mining stocks.

In an interview of Toussaint on Canada's Business News Network (BNN). Touissant admits at the end of the interview that he owns physical gold but does not mention that he owns any GLD. Here is the link to interview -

Toussaint = The Big Whiff The relevant comment starts at the 5:44 mark. The 10-K linked below confirms that Toussaint indeed does not own ANY GLD shares.

But there's so much more ... listen to both parts of the interview. Let's get the basics out of the way. Jason Touissant is the Managing Director the GLD Trust and principle executive officer World Gold Trust Services, the sponsor of the GLD Trust. All of this information can be gleaned from the GLD 10-K, which linked here:

GLD 10-K

Note that on page 76, as Jeff Nielson picked up on from the BNN interview, that NO officers and directors of the World Gold Council or of the GLD Trust own ANY shares.

No insiders own shares. Why would that be the case?

If GLD is as good as owing physical gold, and is fully backed by physical gold, why would Toussaint admit to owning his own physical gold, but not express confidence in the fund that he oversees by owning some the stock in GLD?

NEVER own any mining stocks in a fund in which insiders did not own a meaningful amount of shares. In fact, with junior mining stock holdings, insiders typically own 10-20% of the company.

Now let's get to other interesting aspects of the interview that Nielson did not cover. At the 4:25 mark in Part 2, Toussaint makes the statement that the bar auditor of GLD audits the bars twice a year and physically handles each of the bars once per year. HOWEVER, the auditor, Inspectorate, only looks at the bars in the HSBC vault. As per the prospectus, HSBC has subcustodians with which there is no formal contractual agreement and the prospectus specifically states that no one can have access legally to the subcustodian vaults. Here is the latest inspection report from Inspectorate, the inspection firm: LINK This particular report describes the semi-annual random sample audit.

This is great that an inspection firm goes into the HSBC vault and samples the bars for authenticity and serial numbers, but what about the bars that are at the subcustodians?

You are asked to believe that Inspectorate counts all 104,325 bars (the number of bars that would be in the vault as of 8/26) and verifies serial numbers and stamps and reconciles them with the Custodian's records? You believe that?

The annual audit is another statistical sample BECAUSE no one is allowed to have access to the subcustodian vaults. In fact there have been articles in the recent past which have demonstrated dozens of inconsistencies at GLD and SLV between the actual serial numbers on many of the bars and records kept by the Custodian of each Trust.

Finally, Toussaint makes the statement that the bars are held in allocated form, meaning that within HSBC's vault, all of the GLD bars are placed in a separate holding area and the shareholders of GLD have direct claim to those bars. If HSBC blows up, something that is within the realm of possibilities, the GLD Trust gold is not part of HSBC's asset/liability list.

HOWEVER, the prospectus specifically states that gold which is being transported in and out of the vault and the gold which is being held for redemption by an authorized participant exchaning a minumum of 10,000 shares for bars in the Trust, sit in unallocated form. And the bars at the subcustodian are in unallocated form.

The significance of this is that if HSBC blows up, any unallocated bars become part of the claim of the general creditors to the HSBC bankruptcy proceedings, and the GLD Trust has to stand in line with all of the other unsecured creditors to receive payment, if any, on its claims.

The Prospectus specifically states that, in the event of an HSBC bankruptcy, unallocated bullion bars could result in material loss to the Trust.

Perhaps this is why no World Gold Council officers and directors, and specifically Jason Toussaint, the Managing Director of the GLD Trust for the WGC, do not own any personal shares of GLD.

They know the Golden Truth.

Viva LeMet !

Sat, 09/04/2010 - 17:20 | 563958 duo

DGP Bitchez!

If you're going to own paper, you might as well be leveraged 2x.

Sun, 09/05/2010 - 05:06 | 564429 Hephasteus

He owns physical gold right up until a class action suit by gld holders yanks it right out of his ass.

Sat, 09/04/2010 - 15:53 | 563875 jm

The manipulated bogus farce outperformed Barrick. LOL

Sat, 09/04/2010 - 17:53 | 563979 strannick

Drug dealers and human traffickers probably also outperformed Barrick

Sun, 09/05/2010 - 05:07 | 564430 Hephasteus

So you're saying haliburton earnings are up?

Sun, 09/05/2010 - 11:14 | 564578 Kobe Beef

LOL

Sat, 09/04/2010 - 14:08 | 563782 Monkey Craig

Commodity ETFs - fee generators for the TBTF, Barclays, and BlackRocks of the world

Sun, 09/05/2010 - 03:09 | 564383 Silversinner

Nothing is the same as owning the real stuff.

That's all you need to know.

Sun, 09/05/2010 - 16:24 | 564979 DosZap

The entire point as I see it, is SO WHAT............

It's Unallocated, and you will never be allowed to take physical delivery, when you cash out, ever.

So, is a wonder he doesn't OWN the shares?.Hell no, smart.

Sun, 09/05/2010 - 11:10 | 564571 DarkMath

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=ag6NxaYioN24

Sun, 09/05/2010 - 15:00 | 564891 Leo Kolivakis

Commodity ETFs are the biggest scam ever. Amazingly, some Canadian pension funds were invested in them for "diversification" and "risk mitigation". What a joke!

Sun, 09/05/2010 - 16:28 | 564981 DosZap

I think they are for just Mkt players anyway.

IF they were a VIABLE investment vehicle, then you could actually GET physical when getting out.

Even if it's a 400oz Bar.That would make it an investment.

Closing a position, and only recieving a fiat currency, is at this point legalized theft.

Mon, 09/06/2010 - 23:35 | 566550 pointingtrade

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Guest Post: Commodity ETFs - Diversification Or Beta Generators

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